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THEORY OF CREDIT
€t 8t rovro ayvoct? ori Hlotl^ *A<f>opfirj tcuv Tracrajv cart ftcytOTiy
7rpo9 '^(pTiiiarLa'fiJoVy wdv av ayvcwfo-ctas
If you were ignorant of this that Credit is the greatest
Capital of all towards the acquisition of Wealth, you would
be utterly ignorant
Demosthenes
Credit has done more, a thousand times, to enrich nations
than all the mines of all the world
Daniel Webster
THE
THEORY
OF
CREDIT
BY
HENRY DUNNING MACLEOD, M.A.
OF TBINITT COLLEGE, CAMBBIDOE, AND THE INNEB TEMPLE, BAUBISTBB-AT-LAW
SELECTED BT THE BOTAL OOMMI88IONEB8 FOB THE DIGEST OF THE LAW TO PBEPABB
THE DIGEST OF THE LAW OF BILLS, NOTES, ETC.
HONOBABT UEMBEB OF THE JT7BIDICAL SOCIBTY OF PALEBMO, AND OF THE SICILIAN
SOCIETY OF POLITICAL BCONOMT ;
<30BBESP0NDING MEMBEB OF THE SOCIETE d'ECONOMIE POLITIQUE OF PABIS, AN» OF
THE BOTAL ACADEMY OF JUBISPBUDENCE AND LEGISLATION OF MADBID
IN TWO VOLUMES
VOLUME I .
•>^
LO N.DON \:f-'^NIA ^
LONGMANS, GREEN AND 00.
AND HEW TOBK : 15, EAST 16th STBEET
1889
All Rights Reserved.
WOEKS IN ECONOMICS
By the AUTHOR
Elements of Political Economy. 1858
A Dictionary of Political Economy. Vol I. 1862
The Principles of Economical Philosophy. Two Vols. 1872-75
Lectures on Credit and Banking. 1882
*„,* The above Works are out of Print,
The Theory and Practice of Banking. Two Vols. Fourth Edition.
1883-86. Vol. 1. Price 12/- Vol. H. Price 14/-
The Elements of Economics. 2 Vols. 1881-86. Price 7/6 each Vol.
«
The Elements of Banking, l Vol. Ninth Edition. Price 6/-
Economics for Beginners, l Vol. Third Edition. Price 2/6
PREFACE
It is somewhat surprisiDg that in this great Mercantile
country there is not a single treatise in the English Language
which contains an exposition of the Juridical and Mathematical
principles of the colossal system of Credit, together with their
application in practical commerce
The Romans inventM^ the business which, in modem
language, is termed Banking. The Roman bankers invented
Cheques and Bills of Exchange : and the great Roman Jurists jof
the second and third centuries worked out the complete juridical
principles of Credit : which were incorporated in the Pandects of
Justinian, which were the great Code of the Western Empire : and
in the Basilica, which were the great Code of the Eastern Empire :
which have been the Mercantile Law of Europe for 1,600 years :
and are fully exhibited in every Continental Treatise on Juris-
prudence
But they have not hitherto found their way into any
treatise on Political Economy, or, as it is now becoming more
usually termed, Economics, in any language, except mine
It is quite easy to foresee that the next great subject for
Economical Inquiry in this country will be the anomalous
Systems of Banking and Currency which prevail in the United
Kingdom : and this work is intended as a complete Manual on
the subject.
LONDON :
A. P. Blundell, Taylob & Co., 177, Uppeb Thames Stbest.
CONTENTS
OF
THE FIRST VOLUME
CHAPTER I
DEFINITION OF TERMS
PAGE
1 Definition of Sconoxnics 1
2 Definition of Wealth or of an Economic Cluantity . 2
3 Definition of Wealth by the Economists . . . . S
4 Aristotle's Definition of Wealth 6
5 Three Species of Wealth : or Economic Quantities . . 7
6 Ancient Dialogue to show that Personal dualities are
Wealth 7
7 Modem Economists include Personal Quahties under Wealth IQ
8 Demosthenes shows that Personal Credit is Wealth . 18
9 Modem Economists include Personal Credit as Wealth . 15
10 On Abstract Bights as Wealth 17
11 General Rule of Roman Law that Rights are Wealth . . 21
12 General Rule of Greek Law that Rights are Wealth . . 22
13 General Rule of English Law that Rights are Wealth . . 23
14 Modem Economists class Rights as Wealth .... 25
15 There is no such thing as Absolute Wealth . . . . 28
16 Economics or Commerce consists of Six distinct kinds of
Exchange 28
17 On the Meaning of the word Property .... 30
18 Meaning of Property in English 33
19 On Right of Property and Right of Possession 35
20 Application of the Positive and Negative Signs to Property . 35
21 On the Theory of the Value of Laud 37
• • •
Vm CONTENTS
PAGE
§ 22 Every Sum of Money is Equivalent to the Sum of the
Present Values of an Infinite Series of Future
Payments 39
23 A successful Trader is an Economic Quantity analogous to
Land 40
24 All Annuities are Negative Economic Quantities . 40
25 Corruption of Juridical Language in Modem Times . . 41
26 Wealth in Economics is an Exchangeable Right 45
27 1. Beply to the Dogma of the Economists that Immaterial
and Incorporeal Quantities are not Wealth ... 47
2. On Immaterial Quantities as Bes or Wealth . . 49
3. On Incorporeal Quantities as Bes or Wealth . . 52
28 Jurisprudence is the Science of Bights ... 56
29 Economics or Commerce is the Science of the Exchanges
of Bights 56
30 Meaning of Persona in Roman Law 57
31 Meaning of Bes in Roman Law 59
32 Distinction between Jura in rem and Jura in personam 60
33 Definition of Value 63
34 1. On Money and Credit 64
2. On the Necessity for Money 65
3. Aristotle and others have seen the true Nature of Money 67
4. On Credit 72
35 On Substances used as Money 75
36 The Chinese invented Paper Money . . . . .76
37 On Credits payable in Services 79
38 The Function of Credit is to bring into Commerce the
Present Values of Future Profits . .80
39 The Fundamental Concept of Monetary Science . 81
4
40 Distinction between Money and Credit .... 82
41 Reason why Paper can supersede Money .... 83
42 The same Quantity may require to be regarded in different
Aspects in different Sciences 84
43 There is no Necessary Relation between the Quantity of
Money in any Country, and the Quantity of Commodities
or their Price 85
44 On Barter : Sale or Circulation : and Exchange . 86
45 Meaning of Circulating Medium ^0
46 Meaning of Currency 91
47 Decisions of the Courts of Law regarding the Meaning of
Currency 94
CONTENTS IX
PAOB
48 Different Fonns of Gorrenoy 97
49 On the Channel of Circulation . . ' . . .98
50 On Price 101
51 On Interest and Discount 103
52 On Production 105
53 Three Glasses of Economio Producers 108
54 On Payment and Satisfaction 109
65 On Capital Ill
56 Any Economic Quantity may be used as Capital . . .111
57 Capital may Increase in two ways 115
58 There is no such thing as Absolute Capital .... 117
59 On Fixed and Floating or Circulating Capital . . 118
60 On the Three Ambiguities in the Theory of Credit or
Debt 122
61 On the Distinction between a Debt and a Bailment . . 186
62 List of Words, which in Classical Latin and Greek mean
Material Things, but which in Juridical Latin and
Greek, and in Mercantile Law, mean Abstract Rights
and Duties 141
63 Summary of Definitions 144
CHAPTER n
THE THEORY OF VALUE
Pbeliminaby Remarks 149
Section I
1 The Definition of Value . . . . . . .151
2 Examples of Value 155
3 On Negative Values 156
4 There may be a General Rise or Fall of Prices but not of
Values 158
5 Nothing can have Fixed Value unless Everything has Fixed
Value 159
Section II
6 On the Origin, Source, or Cause of Value . . . 160
7 Investigation of the Form or Cause of Value . . . 162
S Materiality is not Necessary to Value . 162
9 DurabiHty is not Necessary to Value .... 163
10 Error of the Doctrine that Labor is the Cause of Value . 168
CONTENTS
^ 11 Examination of the Doctrine that Labor is the Ganse of
Value 167
12 Besults of the Preceding Inquiry 175
18 Demand is the Sole Cause of Value .... 177
14 Error of the Expression Intrinsic Value .... 180
15 A Standard of Value is Impossible .... 184
16 But there may be a Measure of Value .... 186
17 Value only exists in the Human Mind . . . .187
Section III
18 On the General Law of Value : or the General Equa-
tion of Economics 189
19 Fundamental Conditions of the General Equation of
Economics 190
20 Lord Lauderdale's Law of Value , .193
21 Bemarks on the General Equation of Economics . . . 194
CHAPTER m
THE THEORY OF CREDIT
1 Origin of the System of Credit in Europe
2 The System of Credit
3 Method of Contracting a Loan among the Romans
4 On the Stipulatio : or Verbal Contract
6 On Arcaria Nomina
6 On the Obligatio Litteris : or Written Contract
7 The Obligatio Consensu : or Consensual Contract
Section I
197
198
200
202
203
203
204
8 On the Creation of Obligations 205
9 Division of Opinion among Jurists as to the position of the
Debtor in an Obligation 206
10 Advantage of adopting the Conception of Economics as the
Science of Exchanges or of Commerce .... 208
11 On the Errors made by some Mathematicians in terming
Debts Negative Quantities 209
12 Error of Euler 211
13 Error of Peacock 2 13
14 Further Error of Peacock 216
15 Error of Thornton and Cernuschi 217
CONTENTS XI
PAOX
§ 16 On the Application of the Theory of Algebraical
Signs to Economics 220
17 All Sciences deal with Cluantities and Operations . . 222
18 Examples of the Algebraical Signs applied to Cluantities . 224
19 The Signs + and — may also be applied to Persons who
stand in Opposite Relations to each other . . 227
20 Application of the Positive and Negative Signs to Time . 228
21 The Algebraical Signs applied to Operations . . . 229
22 Jurists also use the terms Positive and Negative to denote
Opposition 230
23 On the true Meaning of saying that Debts are Negative
Cluantities 231
24 If Money be termed Positive Capital, Credit may be
termed Negative Capital 233
Section n
25 On the Transfer of Credits or Debts .235
26 On Property held in Contract : or on jura in personam . 235
27 Property held in Contract is of Two kinds .... 237
28 On the Transfer of Credits or Debts in Roman Law . 240
29 On the Transfer of Credits or Debts in English
Equity and Common Law 247
30 Appointment of a BoyMl Commission to prepare a Digest of
the Law of Eaglani 264
81 The Case of Crouch v. The Credit Fonjier of England 267
32 The Case of Qoodwin v. Bobarts 270
33 Choses-in-action made Transferable by Statute . . . 274
Section III
34 On the Limits of Credit 276
35 On the Extinction of Obligations 279
36 On Acceptilation : or Release 279
37 The Release of a Debt is in all cases equivalent to a Gift
or Payment of Money ...... 280
38 Application of the Principles of Algebra and Mercantile Law
to Commerce 282
39 The E -.lease of a Debt may be held to extinguish an Obliga-
tion in Three different ways ...... 283
40 When + £100 cancels — £1C0 : and when it does not . 285
41 On Payment in Money 286
42 On Confusio 287
xu
CONTENTS
PAOB
§ 48 OnNoTStion 288
44 On Compensstion or Set-Off . . . . « 289
45 On the Ratio of Credit to Money 293
46 Two Branches of the System of Credit . • • « . 295
CHAPTER IV
ON THE SELF-CONTRADICTION OP J. B. SAY AND J. S. MILL
ON CREDIT
1 Credits or Debts are Saleable Commodities .... 297
2 Turgot first erred on Credit 298
8 1. Self-Contradiction of Say on Credit . . . .299
2. Say's Definition of Wealth 299
3. Say's Definition of Value 800
4. Say's Definition of Capital 802
5. Say admits that Instruments of Credit are Capital . . 804
6. Say maintains that those who say that Credit is Capital
affirm that the same thing can be in two places at once 806
4 1. Self-Contradiction of Mill on Credit . . . .308
2. Mill admits that Personal Credit is Wealth . . .808
3. Mill admits that Credit is an Independent and Transfer-
able Quantity 809
4. Mill admits that Rights are Wealth . . . .810
5. Mill admits that Credit may be used as Capital . . 811
6. Mill admits that Credit may be used as Productive Capital 812
7. Mill denies that Credit is Productive Power . . . 312
8. Mill sneers at those who say that Credit is Capital . .312
9. Confusion of Mill on Credit 814
5 Contrast between the Idola, or False Concepts of Debt and
Credit and the True Ones 815
CHAPTER V
UPON INSTRUMENTS OF CREDIT
1 Meaning of Instrument 317
2 Great Extension of the System of Bills of Exchange . . 819
8 1. On the Form of Bills and Notes 821
2. Specimens of early Bills and Notes .... 322
8. Definition of a Bill of Exchange .... 827
4. Definition of a Draft 328
5. Definition of a Promissory Note .... 830
'4 Rules relating to Bills and Notes 330
5 On Banking Instruments of Credit 832
CREDIT
CHAPTER I
DEFINITION OF TERMS
Definition of Economics
1. Economics is the Science of Exchanges: or that which
treats of the scientific principles and mechanism of Commerce,
in its widest extent, and in all its forms and varieties
The word Economics is compounded of the Greek words ot#cos
and voftos
OtKos in Greek means Property, of every sort and description.
Throughout the whole range of Greek literature, from Homer
to Ammonius, the word oIko^ is used as absolutely synonymous
with TrXovToq and xPVH-^y ^^ denote Wealth of every sort. It
is the technical term in Attic Law for a person's whole substance,
or estate, of every form. It includes not only such property as
lands, houses, money, jewelry, corn, cattle, and such property
of a material form : bufc also such property as consists only in
the form of abstract Rights, such as Rights of action, Debts,
Bauk Notes, Bills of Exchange, the Funds, Shares in Com-
mercial Companies, the Goodwill of a business, Copyrights,
Patents, and many other kinds of abstract Rights, which are
termed in Law, Incorporeal Wealth
B
Z THEORY OF CREDIT
No/xos in Greek means a Law
Hence Economics is the Science which treats of the Exchanges
of all the different species of Property : which constitute
Commerce
Hence it may be defined as the Science which treats of the
Laws which govern the Relations of Exchangeable Quantities : or
the principles and mechanism of Commerce in all its forms : it
is also sometimes called the Theory of Value : or the Science of
Wealth
Definition of Wealth, or of an Economic Quantity
2. Next after clearly explaining the nature and purpose of a
Science, it is necessary to define clearly all the technical terms
used in it
In almost every science a considerable number of the definitions
are taken from words of common discourse which have a variety
of meanings. But in a formal scientific treatise it is indispensably
necessary to select one out of these diverse meanings as suitable
for the particular science, and to use it uniformly in that sense
throughout the work
Nor is it sufficient to enumerate a number of isolated objects
under a definition. As pointed out by Bacon long ago, a scientific
definition essentially requires some Principle or Quality, which is
common to all the objects enumerated. It is not sufficient to
allege that lands, houses, jewelry, money, cattle, labor and
services, Debts, Rights of action, the Funds, Shares in commercial
companies, &c., are Wealth, without clearly defining the Quality,
or principle, which is common to them all, and which constitutes
the essence of Wealth. This is what Whewell calls the Colligation
of facts
It is also a principle in framing definitions that, when once
the Quality, or Principle, is agreed upon which is the basis of the
Science, all Quantities whatever which have that Quality in
common must be included in the definition, however diverse may
be their forms and natures : and even though they possess no
other Quality in common except that single one
What, then, is the common Quality, or Principle, which
constitutes things Wealth?
HOW THE ECOXOMLSTS DEFINED WEALTH 3
The meaning of the word Wealth has been the subject of
controversy for centuries, and in considering this important question
it appears to us that, upon the whole, the best way will be to explain
the meaning of the term as used by the Economists who founded
Economics as a Science, and then to consider how far it is consistent
with the scientific principles of framing definitions ; and how far
preceding and subsequent writers have differed from it
Definition of Wealth hy the Economists
3. The Economists defined Wealth {Richessff), to be the
Material products of the earth, which are brought into Commerce,
and Exchanged, and those only
Thus, Baudeau says^— "Useful and agreeable objects, proper
for our enjoyment, are called Biens {Goods), because they conduce
to the preservation, the propagation, and the well-being of the
human race "
The Products which the producers consumed themselves, the
Economists termed Biens
** But, sometimes, these Biens (Goods) are not Bichesse ( Wealth)^
because they cannot be exchanged for other goods, or be used to
procure other enjoyments. The products of nature, or the works
of art, the most necessary, or the most agreeable, cease to be
Wealth (Rkhesse), when you lose the power of exchanging them,
and of procuring other enjoyments by means of this Excliange.
One hundred thousand feet of the most beautiful oak in the world
would not be Wealth (Richesae) to you in the interior of North
America, where you could not devest yourself of its pos8es3ion by
means of an Exchange "
'* The title of Wealth (Richesse), therefore, supposes two things :
first, useful Qualities, which render the objects useful and agreeable,
and fit for enjoyment — which renders them Biens {Goods) —
secondly, the possibility of exchanging them, which enables these
hiens (goods) to procure you others, which constitutes them
Bichesse— Wealth "
*' The possibility of Exchange supposes that there are other
goods for which they can be exchanged "
^ Introduction d la Philosophie Economique, ch. I., 5
B2
/
4 THEORY OF CREDIT
So Quesnay says' — " We must distinguish between Biens
(Gooiis), which have Value in use and not Value in exchange:
and Richesse, or Wealth, which has both Value in Use and
Value in Exchange. For instance, the savages in Louisiana
enjoy many Biens, such as wood, game, the fruits of the earth,
&c., which are not Richesse — Wealth — because they have no
Value in Exchange
" But since some kinds of commerce have been established between
them and the French, the English, the Spaniards, &c., part of
these Biens have acquired a Value in Exchange, and have become
Richesse— Wealth "
So, also, Le Trosne says^ — " Man is surrounded by wants which
are renewed every day
** Whatever they are, it is only from the earth they can draw
the means of supplying them (?) The physical truth that the
earth is the source of all Biens, is so self-evident that no one can
doubt it. . . . But it is not sufficient to estimate products
by their useful qualities : we must consider the properties they
have of being exchanged against each other
" Products acquire, therefore, in a state of society a new
Quality, which springs from the communication of men with each
other : this Quality is Value : which makes products become
Richesse — Wealth : and so there is nothing superfluous, because
the excess becomes the means to obtain what one wants
** Value consists in the Relation of Exchange, which exists
between such aud such products ....
'*In a word the Quality of Richesse supposes not only a
useful property, but also the possibility of exchange : because
Value is nothing hut the Relation of Exchange
*'The earth in truth only gives products which have
the physical qualities to satisfy our wants : it is Exchange
which gives them Value: a Quality relative and accidental.
But as it is the products themselves which are the sole
matters of exchange, it follows that we may say with truth
that it is the earth which produces not only all Biens, but all
Wealth " (?)
1 Maximes Gen4rales du Gonvemement, Max. 18, note
2 De Vinteret sociale, Ch, I., § 1, 2, 3, 4
HOW THE ECONOMISTS DEFINED WEALTH 5
Now we observe that it is true that man has constant wants.
But it is not true that it is the earth only which supplies the
means to satisfy them. Man has not only physical wants, bub has
mental wants — he constantly wants services of different kinds :
the services of advocates, physicians, surgeons and many others.
And he pays for them just as he pays for the physical substances
which minister to his physical wants. Consequently the earth is
not the source of all that ministers to the wants of man
However, the definition of Wealth by the Economists
was perfectly clear. It was the material products of the earth
which are brought into Commerce and exchanged, and those
only
Thus the Economists made Exchangeability the real essence
of Wealth : but they restricted it to Exchangeable Material
products
But as a matter of fact there are other things which can be
bought and sold, or exchanged, besides material products. Thus
Labor or Services can be bought and sold
So also Abstract Bights, such as Credits or Debts, Bank
Notes, Bills of Exchange, Shares in Commercial Companies, and
many other kinds, can be bought and sold, and possess the
quality of Exchangeability
Nevertheless, the Economists steadfastly refused to admit that
Labor and Crecjit are Wealth : because they alleged that to admit
Labor and Credit to be Wealth would be to maintain that Wealth
can be created out of Nothing. They repeated a multitude of
times that man can create Nothing : that Nothing can come out of
Nothing — ex nihilo nihil fit
Seeing then that the Economists admitted that Exchangeability
is the real essence of Wealth : and that other Quantities besides
material ones possess the Quality of Exchangeability, it is necessary
to inquire whether it is consonant to the Laws of Natural
Philosophy, and tlie doctrine of other Economists, both ancient
and modern, to exclude Labor and Credit from the term Wealth,
and to restrict it exclusively to material products
It is also necessary to see what reply can be given to
the dogma that man can create Nothing ; and that Ex 7iihilo
nihil fit
6 THEORY OF CREDIT
Aristotle^ 8 Definition of Wealth
4. Ancient writers for 1,300 years unanimously held that
Exchangeability, or the capability of being bought and sold, is the
sole essence and principle of Wealth : and that everything what-
ever which can be bought and sold, or exchanged, is Wealth :
whatever its nature or its form may be
Thus Aristotle says Nicomach Eth. B.V.
** And we call Wealth all Things whose Value can be measured
in Money "
So the eminent Roman jurist Ulpian says : —
" Ea enim Res est quae emi et venire potest "
*' For that is Wealth tvhich can be bought a7id sold "
All the most eminent modern Economists have come to agree
in this Definition. Thus Mill says^ : —
" Everything, therefore, forms a part of Wealth which has a
Power of Purchasing "
Here we have a perfectly good General Concept, or Definition,
which contains only one General Idea ; and it is therefore fitted
to form the basis of a great Science. It is a concept as wide and
general as the dynamical definition of Force. That single sen-
tence of Aristotle is the germ out of which the whole Science of
Economics is to be evolved, just as the huge oak tree is deve-
loped out of the tiny acorn
A Quantity means Anything which can be Measured : hence
an Economic Quantity means Anything whose Value can be
measured in Mo7iey
The sole criterion, then, of anything being Wealth is — Can it
be bought and sold ? Can it be exchanged separately and
independently of anything else ? Can its value be measured in
money ?
^Fieliniinary Remarks ^ p. 5
PERSONAL QUALITIES ARE WEALTH 7
This criterion may seem very simple : but in fact to apply it
properly : to discern what can be bought and sold independently
of anything else : or all the things whose Value can be measured
in Money : requires a thorough knowledge of some of the most
abstruse branches of Law and Commerce
On the Three Species of Wealth : or of Economic Quantities
6. Having then adopted Exchangeability, or the capability of
being bought and sold, as the sole essence and principle of Wealth,
we have next to discover how many different orders, or species, of
Quantities there are which satisfy this definition
First there are Material Things of all sorts, such as lands,
houses, money, jewelry, corn, &c., which can be bought and
sold, or whose Value can be measured in money. Every one now
admits all these things to be Wealth, and therefore we need say
nothing more about them here
There are, however, two other orders of Quantities which can
be bought and sold, or whose Value can be measured in money ;
and in modern times there has been a vast amount of controversy
as to whether thev should be admitted to be wealth or not ; and
it is these species of Quantities which we have now to consider
Ancient Dialogtie to show that Personal Qualities are Wealth
6. There is a very remarkable work of antiquity extant, which
is the earliest treatise, that we are aware of, on an Economical
question. It is a dialogue called The Eryxias^ or On Wealth, and
is frequently bound up with the works of Plato. It is attributed
to -^schines Socraticus, one of the most distinguished disciples of
Socrates. Critics, however, unanimously pronounce it to be
spurious, without being able to attribute it to any definite author.
High authorities consider that it was probably written in the
early Peripatetic period
The dialogue is to the following effect :— The Syracusans had
sent an embassy to Athens : and the Athenians had sent a return
embassy to Syracuse. As the ambassadors were entering the city
on their return, they met Socrates and a party of his friends, with
whom they entered into conversation. Erasistratus, one of the
8 THKOKY OF CREDIT
envoys, said that he had seen the richest man in all Sicily.
Socrates immediately started a discussion on the nature of Wealth.
Erasistratus said that he thought upon the subject as every one
else did, and that to be vrealthy meant to have much money.
Socrates asked him what kind of money he meant : and lie
instanced moneys of several countries. At Carthage they used
as money leather discs, in which something was sewn up, but no
one knew what it was. And he who possessed the greatest
quantity of this money at Carthage was the richest man there.
But at Athens he would be no richer than if he possessed so many
pebbles from the hill. At Lacedasmon they used iron as money,
and that useless iron. He who possessed a great quantity of this
iron there would be wealthy, but anywhere else it was worth
nothing. In .Ethiopia, again, they used carved pebbles as
money, which were of no use anywhere else. Among the nomade
Scythians a house was not Wealth, because no one wanted a
house, but greatly preferred a good sheepskin cloak. He showed
that if anyone could live without meat and drink, they would not
be Wealth to him, because he did not want them
Socrates showed that Money is only Wealth because it is
exciiangeable ; because it can purchase other things. Where it
is not exchangeable, where it cannot purchase other things, it is
not Wealth
He then asked why some things are Wealth, and other
things not Wealth ? Why are some things Wealth in some
places, and not in other places ? He showed that whether a thing
is Wealth or not depends entirely upon human Wants and
Desires : that everything is Wealth which is Wanted and
Demanded. That things are Wealth, ^(prjfiaTa, only when and
where they are xpw''t^i ^^^^ % when and where they are Wanted
and Demanded
Thus we see that though Fome persons might be puzzled at
the meaning of the word Wealth, there is no possibility of mistake
when we refer to the Greek, because xPVM-^i which is one of the
most usual words in Greek for Wealth, comes from xp^of^^h to
want or demand. Consequently the word xPVH-^i Wealth, means
simply anything whatever w^hich is wanted and demanded : no
matter what its nature or its form may be
LABOR IS WEALTH 9
It is, then, human Wants and Desires which alone constitutes
anything Wealth. Anything whatever which persons want and
demand, and are willing to pay for : everything therefore which
can be bought and sold is Wealth, whatever its nature or its form
may be : and anything which no one wants or demands is not
Wealth
Socrates then showed that gold and silver are only Wealth in
so far as they enable us to obtain, or purchase, what we want and
demand. And that if anything else will enable us to purchase
what we want and demand in the same way that money does, it is
Wealth for the very same reason that gold and silver are
Socrates then instanced persons who gained their living by
giving instruction in the various sciences. He said that persons
were able to purchase what they wanted by giving this instruction,
just as they were able to do so with gold and silver. Consequently
he said that the Sciences are Wealth — ai* cTrtony/xai xpijfiaTa ova-ai:
and that those who are masters of such sciences are so much the
wealthier — irXova-iwrepoL ctcri
Now, in instancing the Sciences as Wealth, that is, of course, a
general term for Labor, because Labor in Economics is any
exertion of human ability or Thought, which is wanted,
demanded, and paid for. Thus, the author of this dialogue
showed that Labor is Wealth
Socrates shows that the Mind has wants and demands as well
as the body, and that the things which are wanted and demanded
for the mind, and are paid for, are equally Wealth, as those things
which satisfy the wants and demands of the body, and are paid
for
Thus each of the great professions. Law, Physic, Surgery,
Engineering, &c., are great Estates, which produce Utilities,
which are as much wealth as the Utilities which satisfy the wants
of the body
Now, Labor cannot be seen or handled : it cannot be trans-
ferred by manual delivery : but iis Valvs can he measured in
Money, and therefore it satisfies Aristotle's definition of Wealth.
If any person wants another to do any labor or Service
for him, and pays him for it, its Value is measured in Money
as exactly as if it were a material chattel. Suppose that a
10 THEORY OF CREDIT
person gives fifty guineas for a watch or a horse, and also fifty
guineas for the opinion of an eminent advocate, the value of the
opinion is measured in money as exactly as that of the horse, or
the watch : and therefore they are all equally Wealth
So if a person earns an income of some thousands a year as
the Manager of a great Mercantile Company, Banking, Insurance,
Railway, or any other, his services are as much wealth to him as
corn or cattle to a farmer, or goods to any other trader
Hence the author of this dialogue showed that Personal
Qualities in the form of Labor are Wealth
Mod^n Economists include Personal Qualities under the term
Wealth
7. It has been seen that the Economists expressly excluded
Personal Qualities from the term Wealth
But we have shown in the Introduction that Adam Smith
extended the Science of Economics by including Personal Quali-
ties as Wealth, in accordance with the doctrine of the author of
the Eryxias ; and in contradiction to his friends the Economists
Under the terms Fixed Capital Smith enumerates^ — "The
acquired and useful Abilities of all the inhabitants or members of
the society. The acquisition of such Talents, by the maintenance
of the acquirer during his education, study, or apprenticeship
always costs a real expense, which is a Capital fixed and realised,
as it were, in his person. The Talents, as they make part of his
Fortune, so do they likewise that of the Society to which he
belongs "
So he says — ** The Property which every man has in his own
Labor, as it is the original foundation of all other Property, so it
is the most sacred and inviolable. The Patrimony of a poor man
lies in the strength and dexterity of his hands "
J. B. Say dwelt with emphatic force on the doctrine that
Personal Qualities are Wealth. Among many other passages he
says^ : — "He who has acquired a Talent at the price of an annual
1 Wealth of Nations, B. II., ch. 1
2 CourSy Comideratiom Generalcs
J
PERSONAL QUALITIES ARE WEALTH 11
sacrificd, eiijojs an accumalated Capital, and this Wealth, though
Immaterial, is, nevertheless, so little fictitious, that he daily
exchanges the exercise of his art for gold and silver "
^* Since it has been proved that Immaterial Property, such as
Talents, and acquired Personal Abilities, form an integral part of
Social Wealth "
*' You see that Utility, under whatever form it presents itself,
is the source of the value of things : and what may surprise you
is that this Utility can be created, can have value, and become
the subject of an Exchange, without being incorporated in any
material object. A manufacturer of glass places value in sand :
a manufacturer of cloth places it in wool : but a physician sells
us a Utihty without being incorporated in any matter. This
Utility is truly the fruit of his studies, his Labor, and his Capital.
We buy it in buying his opinion. It is a real product but
Immaterial "
Say calls all species of Labor and Services Immaterial Wealth,
because they are vendible products or commodities, but not
embodied in any matter. This is an excellent name, and we
shall adopt it to distinguish this order of Economic Quantities
from material things and abstract Rights
Senior has a long and eloquent passage to the same purpose^ —
** If the question whether Personal Qualities are articles of Wealth
had been proposed in classical times, it would have appeared too
clear for discussion. [We have already seen that the question was
discussed in classical times]. In Athens, every one would have
replied that they, in fact, constituted the whole value of an €fiifnjxov
opyavov. The only differences in this respect between a freeman
and a slave are, first, that the freeman sells himself, and only for a
period, and, to a certain extent : the slave may be sold by others,
and absolutely : and, secondly, that the Personal Qualities of the
slave are a portion of the Wealth of his master: those of the
freeman, so far as they can be made the subject of Exchange, are
part of his own Wealth. They perish, indeed, by his death, and
may be impaired or destroyed by disease ; or rendered valueless
by any change in the custom of the country, which shall destroy
the demapd for his services : but, subject to these contingencies,
1 Political Economy, p. 10
12 TIIEOUY OF CUEDIT
they are Wealth, and Wealth of the most valuable kind. The
amount of revenue derived from their exercise in England, far
exceeds the rental of all the lands in Great Britain "
So also — *'Even in our present state of civilisation, which high
as it appears by comparison, is far short of what may be easily
conceived, or even of what may be confidently expected, the
Intellectual and Moral Capital of Great Britain far exceeds all
the Material Capital, not only in importance, but in productiveness.
The families that receive mere wages probably do not form a
fourth part of the community: and the comparatively larger
amount of the wages, even of these, is principally owing to the
Capital and Skill, with which their efforts are assisted and directed
by the more educated members of the society. These who receive
mere rent, even using that word in its largest sense, are still fewer :
and the amount of rent, like that of wages, principally depends
on the knowledge by which the gifts of nature are directed and
employed. The bulk of the national revenue is Profit : and of
that profit the portion which is merely interest on Material Capital
probably does not amount to one third. The rest is the result of
Personal Capital, or, in other words, of Education
" It is not in the accidents of the soil, in the climate, in the
existing accumulation of the instruments of production, but in
the quantity and diffusion of this Immaterial Capital, that the
Wealth of a country depends. The climate, the soil, and the
situation of Ireland have been described as superior, and certainly
not much inferior to our own. Her poverty has been attributed to
the want of Material Capital : but were Ireland now to exchange
her native population for seven millions of our English north
countrymen, they would quickly create the Capital that is wanted.
And were England north of the Trent, to be peopled exclusively
by a million of families from the west of Ireland, Lancashire and
Yorkshire would still more rapidly resemble Connaught. Ireland
is physically poor, because she is morally and intellectually poor.
And while she continues uneducated, while the ignorance and the
violence of her population render persons and property insecure,
and prevent the accumulation and prohibit the introduction of
Capital, legislative measures, intended solely and directly to relieve
her poverty, may not indeed be ineffectual, for they may aggravate
PERSOXAL CREDIT IS AVEALTH 13
the disease, the symptoms of which they are meant to palliate,
but undoubtedly will be productive of bo permanent benefit.
Knowledge has been called potoer — it is far more certainly Wealth.
Asia Minor, Syria, Egypt, and the northern coast of Africa, were
once among the richest, and are now among the most miserable
countries in the world, simply because they have fallen into the
hands of a people without a safficiency of the Immaterial sources
of Wealth to keep up the Material ones "
So Mill says^ — **The skill and the energy and the perseverance
of the artisans of a country are reckoned part of its Wealth no less
than its tools and machinery,'* and why not the skill and energy
and perseverance of other classes as well as of artisans ? He also
says — *' Acquired capacities, which exist only as a means, and
have been called into existence by Labor, fall exactly as it seems
to me, within that designation"
So Madam Campan inscribed over the Hall of Study in her
establishment at St. Germain —
" Talents are the ornaments of the rich and the wealth of the
poor
>>
We have, then, already found two distinct kinds of things
which can be bought and sold : or whose Value can he measured in
Money : (1) Material Things which can be seen aud handled, such
as money, cattle, corn, &c. : and (2) Things which can neither
be seen nor handled, but which can be bought and sold : aud
though these two kinds of things have nothing in common except
the capability of being bought and sold, they are each, for that
reason, comprehended under the term Wealth
Demosthenes shews that Personal Credit is Wealth
8. But Personal Qualities may be used as Purchasing
Power in another method besides that of Labor
If a merchant enjoys good " Credit," as it is termed, he may
go into the market and buy goods, not with Money, but by giving
1 Principles of Political Economy y B. I, ch. 3, § 3
''v
14 THEORY OF CREDIT
his Promise to pay money at a future time for them — that is, he
creates a Bight of Action against himself. The goods become
his property exactly as if he had paid for them in Money. It is
a Sale, or an Exchange. The Right of action is the price he pays
for them : and the Right of action is termed a Credit— in French,
a Creance — because it is not a Right to any specific sum of money,
but only a general Right against the person of the merchant, to
demand a sum of money at a future time
Hence a merchant's Credit is Purchasing Power, exactly as
Money is. When a merchant purchases goods with his Credit,
instead of with Money, his Credit is valued in monet/, because the
seller of the goods accepts his credit as equal in value to money :
his credit is valued in money exactly as his Labor may be. Hence
by Aristotle's definition of Wealth, which is now universally
accepted, the merchant's Personal Credit is Wealth
So Demosthenes says — Against Leptineg, 484, 20
** BvoLV ayaOoiv ovroiv wXovtov T€ koX tov ir/aos aTravras
TTtCTTCvccr^at, fieu^ov eo'TL to ttjs TrtcTTCws virdp^ov T^fuv "
There being two kinds of " Property," or " Goods and
Chattels " — Money and General Credit — our greatest Property is
Credit, which we have
So also. For Phormion, 958
"ct hk TovTo dyvoeis otl Htbrts 'Ac^o/j/xtJ twv Tracrwi/ iari
/xeyLO'Trj irpos XPVf^^'^^^H^^y '"'^^ ^^ dyvo-qo'CLas "
I/you were ignorant of this that Credit is the greatest Capital
of all towards the acquisition of Wealthy you tvould he utterly ignorant
Thus Demosthenes shows that Personal Credit is dyaOd, or
"Goods and Chattels," or " Property"; and d<l}opfi7f, or Capital
Thus, though Credit, like Labor, can • neither be seen nor
handled nor touched : yet it can be bought and sold, or exchanged
— its Value can be measured in Money— it is Purchasing Power —
and, therefore, it is Wealth
And as we have seen that Adam Smith declares that a man's
Labor is his most sacred possession, of which no person has the
Right to despoil him ; so, to all Bankers, Merchants, and Traders,
their Credit is their most sacred possession, of which no one has
the right, falsely, to despoil them
PERSONAL CREDIT IS WEALTH 15
Hence the Personal Credit of all Baakers, Merchants, and
Traders is an integral and colossal portion of the National
Wealth — just as the industrial faculties of working men are
So, also, the Credit of the State, by which it can purchase
Money or other things, by giving persons the Right to demand a
series of future payments from it, is National Wealth
Modern Economists include Personal Credit under the term
Wealth
9. It has been shown that the Economists steadfastly
refused to admit that Personal Credit is Wealth : because they
alleged that to allow that, would be to maintain that Wealth can
be created out of Nothing
But contemporary general, and mercantile, writers, were
entirely against them on that point
The first writer in modern times, that we are aware of, who
perceived the truth of the doctrine of Demosthenes that Personal
Credit is Wealth, was that acute metaphysician, Bishop Berkeley,
who has many searching questions on Economics in his Querist
He asks, Qiies. 35, " Whether Power to command the industry
of others [«.«., Credit] be not real Wealth
So Melon says^ — "To the calculation of Values on Money
there must be added the current Credit of the merchant, and his
Possible Credit
So Dutot says^ — *' Since there has been a regular commerce
among men, those who have need of money have made Bills, or
Promises to pay Money. The first use of Credit, therefore, is to
* represent Money by paper. The usage is very old : the first want
gave rise to it. It multiplies specie considerably ; it supplies it
where it is wanting : and which would never be sufficient without
the Credit ; because there is not sufficient Gold and Silver to
circulate all the products of nature and art. So there is in commerce
a much larger amount in Bills than there is in specie in the
possession of the merchants
^ Essai Politique sur le Commerce^ ch. xxiv.
^Reflexions sur le Commerce et les Finances^ Ch. 1, Art. 10.
^
16 THEORY OF CRKDTT
" A well-managed credit amounts to tenfold the funds of a
merchant : and he gains as much by his Credit as if he had ten
times as much Money. This maxim is generally received among
all merchants
" Credit is, therefore, the greatest Wealth to every one who
carries on commerce "
So Smith says^—** Trade can be extended as Stock increases :
and the Credit of a frugal and thriving man increases much faster
than his stock. His trade is extended in proportion to the amount
of both [t.e., his Stock and his Credit], and the sum, or amount,
of his profits is in proportion to the extent of his trade : and his
annual accumulation in proportion to his Profits "
So Junius says^— " Private Credit is Wealth "
Franklin says^— " Credit is Money "
Smith expressly includes ** natural and acquired abilities "
under the term fixed Capital. Now Mercantile Character, or
Personal Credit, evidently comes under the designation of " natural
and acquired abilities." Hence Personal Credit is comprised
under Smith's term Capital
No person has more explicitly declared that Personal Credit is
Wealth than Mill
In his preliminary remarks, he says — " Everything, therefore,
forms a part of Wealth, which has a Power of Purchasing "
He then says, Bk. III., ch. xi., s. 3 — '* For Credit, though it
is not Productive Power ; is Purchasing Power "
** The Credit, which we are now called upon to consider, as a
distinct Purchasing Power "
So also, Bk. III., ch. xii., s. 3 — "The amount of Purchasing
Power which a person can exercise is composed of all the money
in his possession or due to him {ue,, the Bank Notes, Bills, and
Credits he has), and of all his Credit "
' Wealth of Nations, Bk. 1, c. 10
^Letters, Vol. II., p. 230. Edit. 1812
» Works, Vol. n., p. 250. Edit. 1840
ABSTRACT RIGHTS ARE WEALTH 17
Do. 8. 4. — " Credit, in short, has exactly the same Pnrchasing
Power with Money "
And many other passages to the same effect
Now if Mill lays down as the fundamental definition of
Wealth—
" Everything that is Purchasing Power is Wealth "
And, if he says— "Credit is Purchasing Power," ( ' a / . >.
Then the necessary inference is that — V c. ' V- , "
" Credit is Wealth " ^fe^/^ ' ' '
That is a syllogism in which Mill is safely padlocked, and^^;^.-^'^
from which there is no escape
Hosts of passages from other writers might be cited if
necessary ; but that would be wholly superfluous : because an
argument is to be judged of by its own intrinsic force ; and not
by the number of persons who assert it
The simple statement of the case is this — ancient writers
unanimously held, and modern economists have, at last, come to
agree with them, that the only true definition of wealth is — Any-
thing that can be bought or sold — Anything whose value can be
measured in money — Anything which has Purchasing Power.
Now, as Personal Credit can beValued in Money : and is Purchasing
Power : it necessarily follows that Personal Credit is Wealth
On Abstract Bights as Wealth
10. But there is yet another, or a Third, order of Quantities,
which can be bought and sold, or exchanged, and whose Value can
he meastirfd in Momy ; and these are Atstract Eights of various
kinds — Rights and Rights of action
Suppose that a customer pays in a sum of money to his account
at his banker's— -what becomes of that Money? It becomes
the absolute Property of the banker. The customer cedes the
absolute Property in the Money to the banker, but he does not
make him a present of it. He gets something in exchange for
it — and what is that something ? In exchange for the Money the
banker gives his customer a Credit in his books, which is a Bight
of action to demand back an equivalent sum of Money whenever
c
18 THEORY OF CREDIT
he pleases. The transaction is a Sale or an Exchange ; the
Banker buys the Money from his customer by issuing in exchange
for it a Right of action : and the customer buys this Eight of
action with gold
Furthermore, the banker agrees that his customer may transfer
this Eight of action to any one else he pleases, by means of a
Cheque or Bank Note
So this Eight of action may pass through any number of
hands, and eflTect any number of exchanges, until the holder of it
demands payment of it, and it is extinguished
When the holder of the Cheque demands payment of it from
the banker, the banker buys up the Eight of action against him-
self with gold : and the holder of the Cheque sells his Right of
action for gold
The transaction is, therefore, a Sale or an Exchange, and an
act of commerce
Hence the whole series of these transactions are Sales or
Exchanges. When the customer pays in money to his account,
it is an Exchange ; when he pays away his Cheque in commerce
it is an Exchange ; and every time the Cheque is transferred it is
an Exchange ; and when finally, payment of it is demanded from
the banker, it is an Exchange ; they are all acts of commerce
This Right of action is termed a Credit, because any one who
chooses to take it in exchange for goods or services, knows that it
is not a title to any specific sum of money in the banker's posses-
sion, but it is only an abstract Right of action against the banker
himself, to demand a sum of money from him, and the person who
takes it only does so because he has the Belief or Confidence that
the banker can pay ijt when required
It will be convenient to state here that this Right of action is
also called a Debt, and that both in Law and common usage the
words Credit and Debt are used perfectly indiscriminately to
mean a Creditor's Right of action against his Debtor. The reason
of this will be explained in a subsequent section
Similarly, when a merchant sells goods " on Credit," as it is
termed, to a trader, he cedes the Property of the goods to the
ABSTRACT KIGHTS ABB WEALTH 19
trader, exactly as if he had sold them for Money. And in exchange
for the goods the trader gives the merchant his promise to pay : or
a Right of action to demand the Money at a future time — say
three months — after date. This Right of action is also termed a
Credit or a Debt. It is the Price the trader pajs for the goods.
And if it be recorded on paper in the form of a Bill of Exchange,
it may be exchanged against other goods, and circulate in com-
merce, exactly like an equal sum of money, until it is paid off and
extinguished
Again, suppose that the State wants to borrow a sum of
money for some public purpose — such as a. war, or for some
great public work. It buys money from those who are williug to
sell it, and gives them in exchange for the money the Right to
demand a series of payments from the State, either for ever, or
for a certain limited tenn. The Right to demand a aeries of future
payments, termed an Annuity, and is the Price the State pays
for the Money. In popular language they are termed tlie Funds.
And the owners of these Rights may sell them again to any one
else they please. They are saleable Commodities
Suppose, again, tliat a person subscribes to the Capital of a
Joint Stock Company of any sort — Bankiug, Insurance, Railway,
Canal, Dock or any other. He pays the money to the Company,
which is a distinct Person, and receives in exchange for it the
Right to share in the future profits of the Company. These
Rights are termed Shares, and they are also saleable com-
modities : which may be bought and sold like any material
chattels
So, when a trader has established a successful business, he has
the Right to receive the future profits to be made by the business.
This Right to receive the future Profits, is a Property quite distinct
and separate from and additional to the house or the shop, and
the actual goods in them. It is the product of labor, thought and
cAre, as much as any material chattels, and is a part of the
trader's assets. It is termed the Goodwill of the business, and is
a Saleable commodity
c2
20 THEORY OF CREDIT
Thrale, the great brewer, appointed Jolinson one of his
executors. In that capacity it became his duty to sell the
business. When the sale was going on — ** Johnson appeared
bustling about, with an inkhorn and pen in his button-hole, like
an exciseman, and on being asked what he really considered to be
the Value of the Property which was to be disposed of, answered —
* We are not here to sell a parcel of boilers and vats, but the
Potentiality of growing rich beyond the dreams of avarice.' "
This latter phrase was merely Johnsonese for the Ooodwill of the
business The price realised was, we are told elsewhere, £135,000
When the banking house of Jones, Loyd, & Co. sold their
business to the London and Westminster Bank, it was said in the
papers that the price paid was £500,000
Thus the Goodwill of any business is a saleable commodity
So, when an author has published a successful work, the
Bight to the profits to be made by multiplying copies of it is a
valuable Right, which may be bought and sold like any material
chattel, quite separate from the printed copies of the work. This
Kight is termed Copyright : and is a saleable commodity
So, when a Professional man has established a successful
business, the Bight of receiving the future Profits of the business
is a vahiable Property, which may be bought and sold. This
Property is termed a Practice : it is a saleable commodity
So there are many other kinds of Property which consist
exclusively in Abstract Bights,— such as Patents, Tithes, Tolls,
Shootings, &c., which we need not enumerate at greater length,
because our object is to describe a particular Order of Quantities
and not to enumerate them all
Now these Abstract Rights cannot be seen, nor handled, nor
touched : but they can be bought and sold, or exchanged. Their
Value can be meuHured in Money : they can be transferred from
one person to another as easily as any material chattels : and
therefore they satisfy Aristotle's definition of Wealth. They all
possess that Quality of Exchangeability, which ancient writers
unanimously, and modern writers now at last agree, is the sole
ABSTRACT RIGHTS ARE WEALTH 21
essence and principle of Wealth : and, therefore, by the funda-
mental laws of Natural Philosophy, these Abstract Rights
are all Wealth
General Rule of Roman Law that Bights are Wealth
11. Now in the Pandects of Justinian, which are the great
Code or Digest of Roman Law, it is laid down as a fundamental
General Rule —
" Pecuniffi nomine non solum numerata pecunia, sed omnes res,
tam soli quam mobiles, et tam corpora quam Jura continentur "
" Under the term Wealth not only ready Money, but all things,
both immovable and movable, both corporeal things, and Bights
are included "
So the eminent Roman Jurist Ulpian says—
" Nomina eorum qui sub conditione vel in diem debent,et emere
et vendere solemus. Ea enim Bes est, quae emi et venire potest "
" We are accustomed to buy and sell Debts payable at a certain
event, and on a certain day. For that is Wealth which can be
bought and sold"
So also it is said : — " Mo^ae Bonis adnumerabitur si quid est
in Actionibus "
^'Bights of action are properly reckoned as Goods "
Also—" Rei appellatione et Causae et Jura continentur "
" Under the term Property both Bights and Rights of action
are included "
So Sir Patrick Colquhoun in his Summary of Roman Law
says —
"The first requisite of the consensual contract of emptio et
venditio is a Merx : or object to be transferred i'rom the buyer to
the seller : and the first requirement is that it should be in
commercio : that is capable of being freely bought and sold.
Supposing such to be the case, it matters not whether it is an
immovable or a movable : corporeal or incorporeal : existent or
non-existent : certain or uncertain : the property of the vendor
or another : thus a horse or a Bight of action : servitude, or
thing to be acquired : or the acquisition whereof depends on
chance
22 THEORY OF CREDIT
"A purchaser may buy of a farmer the future crop of a
certain field. Wine which may grow the next year on a certain
vineyard, may be bought at so much a pipe : or a certain price
may be paid irrespective of quantity or quality : and the price
would be due though nothing grew, or for whatever did grow.
In the second case the bargain is termed imptio spei: and in the
first and last emptio ret speratce : which all such bargains are
presumed to be in cases of doubt
** The cession of a Right of action being legal in the Roman
Law : the Right of A to receive a Debt due by B may be sold
to C "
Thus it is clearly seen that Abstract Rights of various sorts,
including Rights of action, which in Law, Commerce and
Economics are termed Credits or Debts, are expressly included
in the terms Pecunia (Wealth) : Res (Property) : Bona (Goods) :
and Merx (Merchandise) s in Roman Law
General Rule of Oreeh Law that Rights are Wealth
12. For nearly 500 years after Constantino removed the seat
of Government from Rome to Constantinople, the language of
the Court was Latin, but the people were Greek. Consequently,
as the official language was Latin, it was unintelligible to the mass
of the people
The great Code of Roman Law, termed the Pandects, was
published in 680 a.d. : but all the pleadings in the Courts
were carried on in Greek. The Latin Pandects soon fell into
desuetude : they were superseded by Greek treatises, translations
and compilations. The Latin Institutes of Justinian did not
hold their place in the curriculum of legal education for more
than ten years. They were superseded by the paraphrase of
Theophilus, one of the Professors of Law, who were charged
with the compilation of the Institutes : and this paraphrase
became the text book for the education of law students
throughout the Eastern Empire
At last, in the ninth and tenth centuries, under the Basilian
Dynasty, all the Pandects, Institutes, and Legislation of Justinian,
were set aside as obsolete. A reformed Digest or Code, was
ABSTRACT RIGHTS ARE WEALTH 23
published in Greek, which was called the Basilica, and this,
henceforth became the Law of the fiastern Empire : and has
remained to the present time as the Common Law of all the Greek
population in the East : and is the Common Law of the modern
Kingdom of Hellas
And the Roman definition of Wealth is adopted and confirmed —
Basil., IL, 2, 214 — "t« ovq^ulti twv ^(prrj/iarwv ov jmvov ra
jlji-qfiaroy dXXd vavra ra Kivrfra Ktu. aKivrjTa^ kqX ra <ro>/xariKa koI
Aocaia 8i/Xovra4 "
" Undtr the term -xfyqfi.aTOy or Wealth • . . . Bights are
included'"
Also, Basil., IL, 2, 21 — **t]5 rw irpayfiaro^ irpoaijyopui' 'cat
Amai k€lI to, A&kata ir€pii)(€Tai "
Under the term wpdyjxava, Chattels, Bights, and Rights of
Action are included
Thus it is seen that by express enactment in Greek Law, the
words xprjiJLara and vpdyfjuiTa include Rights and Bights of
action of all sorts
These Rights are also included under the terms dyaOd (Goods) :
w€piovo-ta (Estate) : dif>opfiy (Capital) : oTko^ (Wealth) : they are
termed ova-ta d<l>dvrj^. Invisible Wealth, and these words include
all the three orders of Economic Quantities
General Rule of English Law that Bights are Wealth
13. It is exactly the same in English Law. Abstract Rights,
or Property, are included under the terms ** Goods," ** Goods and
Chattels," "Chattels," "Merchandise," Vendible Commodities,"
*' Incorporeal Chattels/' and " Incorporeal Wealth," in English Law
A Chattel means any Property of any sort which is not freehold
Thus, Sheppard says^ — " All kinds of emblements, sown and
growing, grass cut : all money, plate, jewels, utensils, household
stuffs. Debts, wood cut, wares in a shop, tools and instruments for
work, wares, merchandise, carts, ploughs, coaches, saddles, and the
like : all kinds of cattle, as horses, oxen, kine, bullocks, goats,
sheep, pigs : and all tame fowl, swans, turkeys, geese, capons,
hens, ducks, poultry, and the like : are accounted as Chattels
» Grand Abndgementj Parti., s. v., Chattels; also ToucJistone, Vol. IL, p. 468
24 THEORY OF CREDIT
"AH Obligations, Bills, Statutes, Recognizances, Judgments,
shall be as a Chattel in the executor
'* All Bight of action to a Personal Chattel is a Chattel "
So, in the case of Ford, 12 Co. 1, it was resolved by Popham,
Chief Justice of England, and the Court, that — " Personal actions
are as ^Yell included within the word " Goods " in an Act of
Parliament as goods in possession "
So, in RyallV, Roivles, 1 Ves., 848, Lord Chancellor Hardwicke,
said — *'The Chattels are . . the Debts {i,e,, Rights of action)
due and to be due . . and Debts come within the words and
meaning of the Act, and would pass in a will thereby *'
Burnet, J., said — ** A Bond Debt is certainly a Chattel
. . the conclusive case is FonVs casSy 12 Co. 1, that personal
actions are included in the word Goods in an Act of ParUament
as goods in possession "
Parker, L. C. B., said — **Bnt Goods and Chattels include
Debts (Rights of action) . . Goods and Chattels comprehend
things-in-action, in the construction of any Act of Parliament "
Lee, C. J., said — " The inquiry is whether choses-in-action
are not included under Goods and Chattels ? And I agree, choses-
in-action will be included therein "
So Blackstone says^ — " For it is to be understood that, in our
Law, Chattels, or Goods and Chattels, is a term used to express
any Property, which, having regard either to subject matter, or
quantity of interest therein, is not freehold "
" Property, or Chattels Personal, may be either in possession
or in action . . Property in action is where a man has not the
enjoyment (either active or constructive) of the thing in question,
but merely a Right to receive it by a suit or action at law "
So Mr. J. Williams says^ — <* Personal Estate is divided ia
English Law into Chattels real and Chattels Personal: the latter
are again divided into GJioaes in Possession and Choses-in-action "
1 Bk. II., Pt. I., c. 6.
2 Ency. Brit.y vol. xviii., Art. Personal Estate
ABSTRACT RIGHTS ARE WEALTH 25
This work deals exclasively with Rights of action, and, there-
fore, we shall henceforth confine onr attention to them
Eii^hts of action, then, being now shown to be Goods and
Chattels, it is absolutely necessary to observe that it is the abstract
Eight of action itself which is the Goods and Chattels, and not
any material on which it may be written down
Rights of action may be bought and sold with perfect facility,
even in the abstract state. Bat it is very common to write them
down on paper in the form of Bank Notes, Cheques, Bills of
Exchange, and other instruments. By doing this they become
capable of manual delivery, and are transferable from hand to
hand like money, or any other material chattel
Abstract Rights of action are Incorporeal Chattels : but when
written down on paper they become strictly Corporeal Chattels, or
Material commodities, exactly like money
Hence the reader must observe that writing a Right of action
down on paper in no way alters its nature. Doing so is merely a
convenient form of rendering it capable of being transferred in
commerce. But it is exactly of the same nature and effect whether
written down on paper or not
Modern Economists include Bights of action : ^.^., Credits or
Debts : under the term Circulating Capital
14. It has been shown that the Economists steadfastly
refused to admit Credits, i.e,. Rights of action, to be Wealth
But it has been shown in the Introduction that Smith
expressly classes Bank Notes and Bills of Exchange under the
terms Circulating Capital : hence Smith expressly recognises the
existence of the three orders of Exchangeable Quantities
Thus Smith expressly includes Money under the term
Circulating Capital : and under the term Mopey he includes
Bank Notes, Bills of Exchange, &c., which he calls Paper
Money — which term is not quite correct — because, though
Bank Notes and Bills of Exchange may be, under certain
circumstances. Money, as will be seen further on — still they are
not absolutely Money. But they are all included under the term
Paper Currency
26 THEORY OF CREDIT
Among several passages, it will be sufficient to quote one
here* —
*^ Suppose that different banks and bankers issue Promissory
Notes payable to bearer on demand to the extent of one million,
reserving in their different coffers £200,000 for answering
occasional demands. There would remain, therefore, in circulation
£800,000 in gold and silver, and £1,000,000 in Bank Notes : or
£1,800,000 of Paper and Money together." He also observes
that Credits in the Bank of Amsterdam are called Bank Money.
Thus we see that Smith in this and numei'ous other passages
places Paper Credit exactly on the same footing as independent
property, and of the same value, as gold and silver
So J. B. Say says*—" The exclusive possession which in the
midst of society clearly distinguishes the Property of one person
from that of another in common usage is that to which tiie title
of Wealth is given. . . . Under this title are included not
only things which are directly capable of satisfying the wants of
man, either natural or social, but the things which can satisfy
them only indirectly, such as Money, Instruments of Credit
(titres de cr^auce), the Public Funds "
Thus Say expressly includes Instruments of Credit, and the
Funds, which are mere Rights of action, under the term Wealth:
and he also includes Bills of Exchange, Bank Notes and Bank
Credits under the term Capital
Thus he says that if a Bank can maintain in circulation a
greater quantity of Notes than it retains specie in reserve, it
augments by so much the Capital of the country
So he also says^ — ** We must include under Capital many
objects which have a value, although they are not material. The
Pxactice of an advocate or notary : the Custom of a shop : the
representation of a sign board : the title of a periodical work, are
undoubtedly property {biens) : they may be bought and sold, and
be the subject of a contract : and they are also Capital, because
they are the fruit of accumulated labor "
» Wealth of Nations, B. H., c. 2
2 Traits d'Economie Politique, p. 1.
* Cours d'Economie Politique, Part IV., c. 5
ABSTRACT RIGHTS ARE WEALTH 27
So Mill says^ — *^ An order or note of hand, or Bill payable at
sight for an ounce of gold [wiiich is Credit] while the credit of
the giver is unimpaired, is worth neither more nor less than the
gold itself"
So, also — " We have now found that there are other things,
such as Bank Notes, Bills of Exchange, and Cheques [which are
Credit] which circulate as Money, and perform all the functions
of it "
He also designates Bank Notes as Productive Capital
Whately is the only English Economist, that we are aware
of, who has called special attention to Incorporeal Property. He
says^ — " The only difficulty I can foresee as attendant on the
language I have now been using, is one which («.«., defining
Political Economy as the Science of Exchanges), vanishes so
readily on a moment's reflection as to be hardly worth mentioning
In many cases, where an exchange really takes place, the fact
is liable (till the attention is called to it) to be overlooked, in
consequence of our not seeing any actual transfer from hand to
hand of a material object. For instance, when the copyright of a
book is sold to a publisher, the article transferred is not the mere
paper covered with writing, but the exclusive Privilege of
printing and publishing. It is plain, however, on a moment's
thought, that the transaction is as real an exchange as that which
takes place between the bookseller and his customers, who buy
copies of the work. The payment of Rent for land is a transaction
of a similar kind, for, though the land itself is a material object,
it is not this that is parted with to the tenant, but the Right to
till it, or to make use of it in some other specified manner.
Sometimes, for instance, rent is paid for a Right of way through
another's field, or for liberty to erect a booth during a fair, or to
race or exercise horses "
And Whately says in a note to this passage — " This instance,
by the way, evinces the impropriety of limiting the term Wealth
to material objects "
1 Princ, of Pol, Econ., B. HI., c. 12., sec. 1
a Lectures on Political Economy t p. 6
'28 THEORY OF CREDIT
Thus in this passage is found the first dim perception that all
Exchanges consist in the exchange of Bights against Bights ; as
will be shown further on
We need not multiply quotations: in fact, those we have
already given are chiefly for the benefit of lay readers ; because it
is one of the most elementary principles of Mercantile Law, clearly
explained and enforced by every Jurist in the world, that a simple
abstract Bight of action, or Credit, or Debt, (and other abstract
Rights with which we are not concerned in this work) is included
under the terms Pecunia, Res, Bona, Merx : XPW*^ 'n-pdyfia, oTkos,
ouo-co, dyaOd, &c. Goods, Chattels, Vendible commodities.
Incorporeal Chattels, Incorporeal Wealth : and that a Right of
action can be bought and sold or exchanged : its Value can be
measured in Money : in every respect like any material chattel
There is no such Thing as Absolute Wealth
15. The preceding considerations show that there is no
such thing as Absolute Wealth — that is, there is nothing which
is in its own nature, and in all circumstances, in all times, and in
all places — Wealth. The sole essence and principle of Wealth is
Exchangeability. For anything to be exchangeable it is necessary
that some one else should Demand it. It is, therefore, solely
huniian wants and desires, and the capacity to give something to
obtain it, that constitutes anything Wealth. Things are only
Wealth in those places and in those times where and when they
are wanted, demanded and paid for : and consequently, they
cease to be Wealth when they cease to be wanted and demanded.
Therefore the very same things may be Wealth in some places and
not in others : and at some times and not at others : and
become Wealth more or less, as the Demand for them increases
or decreases. Hence the amount of Wealth in any country at
any given time is simply the mass of Exchangeable Quantities in it
Economics or Commerce consists of&ix distinct kinds q/" Exchange
16. It has now been shown that for 1,300 years ancient
writers unanimously held that Exchangeability is the sole essence
ECONOMICS CONSISTS OF SIX EXCHANGES 29
and principle of Wealth. That anything whatever which possesses
the principle, or quality, of Exchangeability: everything what-
ever which can be bought and sold, or exchanged — or whose Value
can be measui'ed in Money — is Wealth ; no matter what its form
Or its nature may be
The ancients aho showed that there are Three distinct orders
of Quantities which possess the Quality of Exchangeability: or
whose Value can be measured in Money: namely (1) Material
Things : (2) Personal Qualities, both in the form of Labor and
Credit : (3) Abstract Rights
And reflection will show that there is nothing which can be
bought or sold which is not of one of these three forms : either it
is a material thing : or it is a personal service or quality : or it is
an abstract Right
Hence, as it is positively known that there is nothing which
possesses the Quality of Exchangeability, or whose Value can be
measured in Money, beyond these three orders of Quantities, the
Science is now complete
Now, if all material things be symbolised by the word Money:
and if all personal ser\^ices be symbolised by the word Labor :
and if all abstract Rights be symbolised by the word Credit:
these three distinct orders of Economic Quantities maybe symbo-
lised by the words Money, Labor, and Credit
And all commerce in its widest extent, and in all its forms and
varieties : that is the Science of Pure Economics, consists in the
Exchanges of these three orders of Quantities
There being, then, Three, and only Three, distinct orders of
Exchangeable Quantities, it is evident that they may be combined
two and two in Six different ways
These six different kinds of Exchange are —
1. A Material thing for a Material thing
As when gold money is exchanged for lands, houses, corn,
jewelry, timber, cattle, &c.
2. A Material thing for Labor
As when gold money is paid as wages, fees, or salary for any
service done
3. A Material thing for a Bight
80 THEORY OF CREDIT
As when gold money is given to purchase Bills of Exchange,
the fands, copyrights, patents, shares in commercial companies, or
any other valuable right
4. Labor for Labor
As when persons agree to perform reciprocal services for
each other
5. Labor for a Bight
As when wages, fees, salaries, or any service done is paid for
in bank notes, cheques, bills of exchange, &c.
6. A Bight for a Bight
As when a banker buys one Right of action such as a Bill of
Exchange, and gives in exchange for it a Credit in his books :
which is another Eight of action
The Economists only admitted material products to be Wealth :
and only treated of one species of Exchange, that of products for
products
Beccaria admitted that services are Wealth ; and said that all
exchanges consisted of the exchanges of products for products :
products for services : and services for services : thereby admitting
three kinds of Exchange
But, as a matter of fact, Exchangeable or Economic Quantities,
consist of three orders of Quantities ; and hence, there are six
distinct kinds of Exchange
But, the present work only deals with the commerce in Rights
of action : i,e,^ Credits or Debts
On the Meuning of the word Property
17. It has now been shown that there are Three distinct Orders
of Economic Quantities : i.e., Quantities which possess the Quality
of Exchangeability — and, by the Laws of Natural Philosophy,
and the unanimous doctrine of ancient writers, and of modern
Economists, these are all included under the term Wealth,
namely (1) Material Things : (2) Personal Qualities, both in the
form of Labor and Credit : and (3) Abstract Rights
The next thing to be done is to find a General Term which
will include them all. And that general term will be found in
MEANING OF PROPERTY 31
the word Property. And when we understand the tme and
original meaning of the word Property, it will throw ablaze of
light over the whole Science of Economics : and clear up all
difficulties which the word Wealth has given rise to. In fact, the
meaning of the word Property is the key to the whole sciences of
Jurisprudence and Economics
Most persons, when they hear the word Property, think
of some material things, such as lands, houses, cattle, money,
carriages, jewelry, &c. But that is not the true and original
meaning of the word Property
Property, in its true and original meaning is not a Material
thing ; but the Ownership of, or the Absolute Bight, to some-
thing
Savages,, probably, Jiave very feeble notions of abstract Rights.
Their ideas of Wealth are something which they can lay hold of :
perhaps only acquire by violence, and can only be retained by
bodily" force. They have no idea of abstract Rights separated
from anything material
So in archaic jurisprudence property is described as anything
material which can only be retailed by manual force
In early Roman jurisprudence a pei'son's possessions were
called Mancipium : because they were supposed to be acquired by
the strong hand: and if not retained with a very firm grasp,
would probably be lost
But as civilisation and firm government succeed, men's ideas
are transferred from the actual material things to the personal
Rights in them
Thus in course of time the word Mancipium, which originally
meant the material things which were held by the hand, came to
mean the absolute Bight to them : and in early Roman Law
Mancipium came to mean Absolute Ownership
Thus Lucretius says, III., 971 —
" Yitaque Mancipio nulli datur, omnibus usu "
*' And Life is given in Absolute Ownership to none, but only
as a Loan to alV^
In process of time the word Property came to be denoted by a
term which meant a pure Abstract Bight
32 THEORY OF CREDIT •
All the possessions of the family {Domus) belonged to the
family as a whole. But the head of the house (Dominus, Sccnron/s)
alone exercised all Rights over them. He alone had the absolute
ownership of his familia, or household, including his wife,
children, slaves, and all its possessions. Hence this Right was
termed Dominium^ 8€(m'oT€La, and Dominium was always used in
Roman Law to denote Absolute Ownership
So long as the Pairki Potestas subsisted in its pristine rigor,
no member of the family could have any individual Rights to
things. But in the times of the early Ilmperors the extreme
rigor of the Patria Potestas began to be relaxed. In some cases
individual membere of the family were allowed to have Rights to
possessions independently of the head of the house and its other
members : and this Right was termed Proprietas
The Patria Potestas was further relaxed when the Dominus
granted the exclusive Rights to certain things to his sons and
slaves. This right was termed Peculium
The Emperors Augustus, Nero and Trajan, enacted that the
sons of the family might possess in their own Right, and dispose
of by will, as if they were Domini, what they acquired in war.
This was termed Castrense Peculium
This Right of holding possessions independently of the other
members of the family was considerably extended by subsequent
Emperors, and was always called Proprietas
Proprietas, therefore, in Roman Law meant the absolute and
exclusive Right which a person had to anything independently of
any one else : and was synonymous with Dominium. Neratius,
a jurist of the time of Hadrian, says — "Proprietas id est
Dominium." " Property that is Ownership "
Thus Gains says — *'Non solam autem Proprietas nee eos quos
in potestate habemus adquiritur nobis "
Not only, therefore, do we acquire absolute Property by means
of those, Jcc,
So, also, Justinian . . '* Transfert Proprietatem mercium "
'* Transfers the Property in the Goods "
and in other instances too numerous to mention
Thus the word Proprietas in Roman Law never meant a material
thing : but the Absolute Bight to it : the thiug itself was Materia
MEANING OF PROPERTV
33
Meaning of the word Property in English
18. So also in early English the word Property invariably
meant a Bight and not a Thing
Thus, grand old Wycliffe says — " They will have Property of
ghostly goods where no Property may be : and have no Property in
worldly goods, where (Christian men may have Property "
So Bacon invariably uses the word Property to mean a
Right, and never a Thing, He says, one of the uses of the Law
" is to dispose of the Property of their goods and chattels." He
explains the various methods by which Property in goods and
chattels may be acquired. So he speaks of ** Property or Interest
in a timber tree "
In Comyn's great Digest of the Law there is not a single
instance of the word Property being applied to material things.
He uses it invariably to mean absolute ownership
Thus up to the middle of the last century. Property was
invariably used to mean Absolute Ownership: and was never
applied, at least in any work of authority, to material substances
Every Jurist knows that the true meaning of the word
Property is a Right, and not a Thing. Thus Erskine says — ** The
sovereign or real Right is that of Property, which is the Right of
using and disposing a subject as our own, except so far as we are
restrained by law or pajction "
This meaning of Property has been understood by Economists
as well as by Jurists. Thus Merci^re de la Riviere, one of the
most eminent of the French Economists, says^ — "Property is
nothing but the Right to enjoy. ... It is seen that there is
but one Right of Property : that is a Right in a person : but
which changes its name according to the nature of the object to
which it is applied "
Thus Landed Property means Rights to lands or houses :
Real Property means Rights to realty : Personal Property means
Rights to personal chattels
Nor is the word Property in any way restricted to the
Rights to material substances : but it is also applied to Abstract
Rights
L' Ordre Naturel des Societes PoUtiques, ch, XVIII
D
34 THEORY OF CREDIT
Thus Funded Property is the Right to demand payments
from the State : Literary Property is the Right to the profits
from works of literature and art : Newspaper Property means the
Right to publish certain newspapers : and so there are many other
kinds of Incorporeal Property, such as Shares in Commercial
Companies of all kinds : the Goodwill of a business : a professional
Practice : Patents : Tithes : Advowsons : Shooting Rights :
Market Rights : and many other kinds of Valuable Rights
So, when a person has sold goods on "Credit," and has
acquired a Right of action as their Price in exchange for them,
termed a Credit or a Debt, he has the Property in this Right of
action : and can sell this simple Right of action like any material
chattel
So in the Law of Scotland, what is termed Real Property in
England is termed Heritable Rights, because the Rights to them
pass to the heir. And what is termed Personal Property in
Enghsh Law is termed Movable Rights in Scotland : and under
the term Movable Rights, Debts, or Rights of action are included
Hence Abstract Rights are the subjects of Property in
exactly the same way as Material Chattels
When the Socialists and Communists wish to destroy Property,
as being Robbery, it is not the Material Things they wish to
destroy, but the exclusive Right which private persons have in
them
In the course of this work we shall find that many words
which like Mancipium, in early times, and in classical Latin,
meant material things, have in the progress of civilisation and
Jurisprudence come to mean Abstract Rights : and, most unfortu-
nately, many words which in reality mean Rights, have been
perverted to mean Material Things— to the great confusion of
Jurisprudence and Economics
The word Property means Absolute, Entire, and Exclusive
Ownership: it is the Absolute Right to deal with the things
Material, Immaterial or Incorporeal, in any way the owner
pleases, except in so far as he may be restrained by Law
ALGEBRAICAL SIGNS APPLIED TO PROPERTY 35
Property comprehends the Jus Possidendi, or the Right of
possession : the Jus Utendi, or the Right of using : the Ju8
Frnendi, or the Right of appropriating any fruits or profit from
the object : the Jus Abutendi, or the Right of destroying or
alienating it : and the Jus Vindicandi, on the Right of recovering
it when found in the wrongful possession of any one else
Property, or Dominion, then, does not mean a single Right :
but an aggregate or bundle of Rights : it comprehends the
Totality of Rights which can be exercised over everything
On the Bight of Property and Bight of Possession
19. But though all Property is a Right, it must be observed
that all Rights are not Property
There is an essential distinction between the Right of Property
and the mere Right of Possession
Thus, where one person lends his horse, or a book, or other
chattel, to another : or delivers goods to him as a common carrier
by sea or land, to be carried from one place to another : or
deposits goods, or valuables with him as a warehouseman, for the
mere purpose of being safely kept : or by way of pledge, hypothec,
or lien : or hires a house, a horse, or land : or finds valuable
goods : in these and other cases the person has the mere Bight of
Possession of the varions things : and he can bring an action
against any one who deprives him of their possession. But he
has no right to use the goods except in the way, and for the specific
purpose, for which they are delivered to him. He has, therefore,
only a specific right to them : and not the absolute ownership
in them, to deal with them in any way he pleases
Some of the most subtle and important doctrines in Economics
are based entirely on the distinction between Right of Property
and Bight of Possession
Application of the Positive and Negative Signs to Property
20. Economic Quantities, or Economic Rights, are, then, of
three distinct orders : —
(1) Rights or Property, in some material thing which has
been already acquired
d2
36 THEORY OF CREDIT
(2) Ri<]:ht8 or Property, in Labor or Service
(3) .Rights or Property, in something which is only io he
acquired at some future time
Now it is one of the innumerable applications of the Alge-
braical Signs 4- and — , that if any point in Time be taken as 0,
then Time before this epoch, and Time after this epoch, are
denoted by the opposite signs -h and - ; which sign is used to
denote either Time, being a matter of pure convention
Let us denote Time present by : Time past as Positive ;
and Time future as Negative : it will then be represented thus —
&c. + 5, + 4, + 3, + 2, + 1, 0, - 1, - 2, - 3, - 4, - 5, &c.
*
and it is evident that the Totality of Time from any year preced-
ing the given era, 0, to any year subsequent to the given era, will
be the sum of the Positive and the Negative years
Hence the Products which have already been produced in
the Past, or Positive, years may be termed Positive Products : and
the Products which are to be produced in the Future, or Negative,
years may be termed Negative Products
Now we observe that the first aud the third of the Economic
Quantities, or Rights, enumerated above, are inverse or opposite
to each other. Property, like Janus, has two faces placed back to
back. It regards the Past and the Future. We may buy and
sell a Right to a thing which has already been acquired : and we
may also buy and sell a Right to a thing which is only to be
acquired at mme future time
Now in all mathematical and physical sciences it is invariably
the custom to denote similar Quantities, but of opposite Qualities,
by opposite signs
Hence, as a matter of simple convenience, and following the
invariable custom in mathematical and physical science, if we
denote one of these kinds of Property by the Positive Sign, we
may, as a mark of distinction, denote the other by the Negative
Sign
Now Property in a thing which has already come into posses-
sion in Time past is Corporeal Property: and as we have assumed
above Time past as Positive, Corporeal Property may be termed a
Positive Economic Quantity : and as Property in a thing to he
THEORY OF THE VALUE OF LAND 37
acquired at some future time is Incorporeal : and, as we have
above denoted Time future as Negative, Incorporeal Property
may be aptly designated as a Negative Economic Quantity
And as in all mathematical and physical sciences, the whole
science comprehends both Positive Quantities and Negative
Quantities : so the whole science of Economics comprehends both
Positive Economic Quantities and Negative Economic Quantities,
both Corporeal Property and Incorfwreal Property
By this means w^e double the field of Economics as usually
treated : and we do in Economics what those have done in
mathematical and physical science, who introduced Negative
Quantities into them
By this means we are enabled to obtain the solution of
problems which have hitherto baffled all Economists : and it is
by this means only, that the Theory of Credit can be explained
On the Theory of the Value of Land
21. We shall now show the great practical importance of
applying the Positive and Negative Signs to Property : and of
denoting the Right or Property, in things which have already
come into possession as Positive, and the Right, or Property, to
things which will only come into possession at a future time
as Negative. Because many species of Property are of a mixed
nature : that is, the entire Property in them consists partly of
Corporeal Property, and partly of Incorporeal Property
Property in Land is the highest Property of all ; and to
nnderstand the nature of Property in Land is the grammar of
Property in general
Suppose that we saw a piece of Land on which there were
actually existing products of the value of £8,000. Suppose that
we wished to purchase that piece of Land. Would the owner of
it be willing to sell it for £3,000 ? Most assuredly not. He
would say that though there were only products of the value of
£3,000 on the Land in actual existence at the present time, yet
that the Land would produce a similar amount of products year
by year, to the end of time. He would say that we must pur-
chase, not only the Right to the existing products of the land,
38 THEORY OF CREDIT
but also the Right to the annaal products of the land for ever —
that is an iufinite senes of future products, which will only come
into existence year by year
Thus Property in Land consists of two perfectly distinct
parts, the Right to the products which have alreadij come into
existence, and the Right to the products which will only come
into existence in future
This Property in land may be conveniently denoted thus : —
Existing products of the land (+ £3,000): together with
(- £3,000, - £3,000, - £3,000 .... for ever)
Where the Positive Sign denotes the products which have
already come into existence : and the Negative Sign denotes
the products which will only come into existence year by year for
ever
But though the yearly products of the land will only come
into existence at future intervals of time, the Right or Property
to them, when they do come into existence, is Present : and it
may be bought and sold like any material chattel, such as a table
or a chair., That is to say, each of these annual products for ever
has a Present Value : and the purchase money of the land is
simply the sum of the Present Values of this series of future
products for ever
Again, although this series of future products is infinite, a
simple Algebraical formula shows that it has a finite limit : and
that finite limit depends chiefly on the usual average Rate of
Interest. When the usual average Rate of Interest is 3 per cent.,
the theoretical value of land would be about 33 times its annual
value. Consequently of the total value of land, one part in 33
only is Corporeal, the remaining 32 parts are Incorporeal
Now, when a purchaser has bought an estate in land, it may
be said without any very great metaphor, that it Owes him a
series of annual payments for ever. Because he only bought it
in the belief or expectation, that it would yield these profits.
Hence we may call the Right to receive the future products of
the land, the Credit of the land. And by the notation we have
adopted, it is a Negative Economic Quantity
Thus the purchase of an estate in land is simply the purchase
of a perpetual Annuity
MONEY EQUAL TO A SERIES OF PAYMENTS 39
Every Sum of Money is Equivalent to the Sum of the Present
Values of an Infinite Series of Future Pajrments
22. The investio:ation of the Theory of the Value of Laud
demonstrates a proposition of great importance in Economics
Ifc is seen that the £100,000 given to purchase the Estate in
Land, expected to produce £3,000 a year for ever, is in Reality
the Sum of the Rights to its future products for ever. Each
annual product has a Present Value, and the Value of the Land
is simply the sum of this infinite series of Present Values
But the same is evidently true of every sum of money. Hence
every sum of Money is not only equal in Value to a quantity of
goods, or services, but also to a perpetual Annuity
An Annuity is the Right to receive a series of payments.
The lowest form of an Annuity is the Right to receive a single
payment, like a Bank Note, a Cheque, or a Bill of Exchange.
The highest form is the right to receive an infinite series of
future payments, like the Land, or the Funds. And, of course,
there may be the Right to receive a limited number of future
payments, intermediate between the other two
Hence an Annuity, or the Right to receive a series of
payments, is an Economic Quantity, which may be bought and
sold : or whose Value may be measured in money : like any
material chattel
As when a sum of Money is paid to purchase Land, or the Funds
or Municipal and other Obligations, such as Railway Debentures
So an Annuity may be paid to receive a certain sum of money
at a given time, or on a given contingency, such as a life or fire
insurance
It is thus seen that Economics consists of three great depart-
ments : (1) Material things ; (2) Personal Qualities; (3) Annuities
Modern Economists have paid considerable attention to the
first two of these departments. But they have almost entirely
ignored, or neglected, the third : and yet at the present day it is
the most important of any : because it comprehends the whole
Theory of the Value of Land : the Funds : Mercantile Credit :
Banking : the Foreign Exchanges ; Shares in Commercial Com-
panies : and all other Incorporeal Wealth
40 THEORY OF CREDIT
Personal Credit — A successful Trader is an Economic Quantity
analogous to Land
23. Now, a person exercising any profitable business or
profession, is an Economic Quantity analogous to Land
He may have accumulated a quantity of money as the fruits
of his skill, industry, and ability in time past. But, over and
above his accumulated money, he has the same skill, industry, and
ability to earn profits in the future. His capacity to earn profits
in the future is exactly the same as his capacity to have earned
profits in the past. And, of course, he has the Right, or Property,
in his expected profits in the future
And he may trade in two ways : he may trade with the Money
he has already acquired, the profits of the past : or he may trade
by purchasing goods by giving in exchange for them the Right,
or Property, to demand payment at a future time out of the profits
which he expects to earn in the future
Personal Character, used to trade in this way, as Purchasing
Power, is termed Credit. And, as we have seen that Anything
which has Purchasing Power is Wealth : it follows that Money
and Credit are equally Wealth
But it is evident that Money and Credit are inverse and
opposite to each other. Hence, if Money is a Positive Economic
Quantity, Credit is a Negative Economic Quantity
All Annuities are Negative Economic Quantities
24. Hence it is seen that all Annuities, or the Rights to
a series of future payments : whether the Right be to a single
future payment : or to a limited number of them : are Negative
Economic Quantities
These Negative Economic Quantities comprehend all Mercan-
tile and Banking Credit, such as Bank Notes, Bills of Exchange,
Cheques, Exchequer Bills, Navy Bills, Dividend Warrants, &c. :
also the Land : the Funds : terminable Annuities : Shares in
Commercial Companies : the Goodwill of a business : a professional
Practice: Patents: Copyrights: Tolls: Ferries: Market Rights :
Advowsons: Benefices: Shootings: Leaseholds: Policies of Insur-
ance of different kinds : and other Rights
CORRUPTION OF LANGUAGE 41
Corr?/ption of Juridical Language in Modern Times
25. It has been shown that many words wliich, in Archaic
Jurisprudence, and classical Latin, mean Material Things, in
Juridical Latin, mean Bights
Thus, it is pointed out in Koman Law, that the words Iter
Actus, and Fta, which are usually supposed to mean the roadway
or pathway, do not mean the material pathway or roadway, but
the Right of way
So, Aqumducfus does not mean the material channel in which
the water flows ; but, the Bight of drawing water over another
person's grounds, to which the material channel is appurtenant
So, Aquoehaustus is the Bight of drawing water in another
person's grounds
But, by a reverse process, many words which originally meant
Rights, have been corrupted, in popular usage, to mean Things
Thus, the word Possession in reality means a Bight to things;
but, in popular usage, it is applied to the Things themselves
So, Dominium originally meant Absolute Ownership : but, in
popular usage, it is applied to mean the space of country over
which this Dominion is exercised
So, Frovincia means, properly, certain powers of administra-
tion entrusted to an official : but, in popular usage, it is applied to
the extent of country over which this jurisdiction is exercised
This corruption of language has extensively prevailed in
English, and a number of words which in Juridical language mean
Rights, are, in common parlance, used to mean Things
Thus, when a nobleman or gentleman, has a large Estate : it
is popularly supposed that he has the Property in a large quantity
of Land : and the Land is popularly supposed to be his Estate
This, however, is a complete error. In the first place, as
Williams says : — " The first thing the student has to do is to get
rid of the idea of absolute ownership. Such an idea is quite
unknown to English Law. No man is, in law, the absolute owner
of lands. He can only hold an Estate in them "
Absolute property in land is termed allodial. In the Roman
Empire the owners of land held it in absolute Property, or
Dominion, without any superior. And, before the Conquest, this
42 THEORY OF CREDIT
was the case in Eogland, and other countries. Wherever the
Roman Law prevailed the land was equally divided among a
man's children at his death, the same as his movable goods. This
was the origin of the small properties in France, which so many
believe was the consequence of the French Revolution : whereas,
the fact is that this law was inherited from the Roman Empire,
and it applied to all roturier land. But all feudal land was taken
out of its operation, and subjected to the law of primogeniture.
What the French Revolution did was to re-establish the law of
equal partition in regard to feudal land. The law of equal
division also prevailed in England : and it is supposed that the
multitudinous hedgerows which, in many parts of the couutry,
used to divide the land into so many minute patches, but which
have greatly disappeared before the improvements in agriculture,
were the consequences of this law
Feudal tenure had, to a certain extent, been introduced into
England before the Conquest. But, at a great Council held at
Sarum in 1086, the whole lands of England were surrendered in
absolute property to the Crown, except Church lands, and the
County of Kent. William I. made a composition with the men
of Kent to maintain their ancient customs : so that, in Kent, the
land remains as formerly divisible equally among the sons. This
is called the custom or law of Gavelkind : but most of the land
in Kent has been disgaveled by various Acts of Parliament
The Conqueror, then, being the sole absolute proprietor of the
land in England, except as above, granted out to his followers
certain Bights of use and enjoyment in certain lands : and these
Bights were termed Estates
But the persons to whom these Rights were granted were
bound to render certain services in return ; and, they were never
called Owners, or Proprietors, but only Tenants. They were only
permitted to enjoy the use and profits of these lands on the
express condition of rendering those services to the Crown, which,
if they failed to do, they were as strictly liable to forfeiture as a
modern tenant, or farmer, for the non-payment of rent. And, at
first, these estates were neither alienable nor transmissible by will,
but were strictly life tenancies, which reverted to the Crown at the
death of the tenant
COREUPTION OF LANGUAGE 43
Thus Littleton speaks of tenants in fee simple : Tenants for
life : Tenants at will : Tenants by copy : Tenants for terms of
yeai*s : joint Tenants : Tenants in common : Tenants by grand
serjeanty. And the Index, or Tabula, says : — ** The first book is
of Estates which men have in lands and tenements :" and, in page
1, he says: — ** For these words (his heirs) make the Estate of
inheritance." So, in Book III., c. 2. :-—" Of Estates upon
condition," he says, "estates which men have in lands and
tenements upon condition are of two sorts." And so on, in many
other passages. Littleton would never have dreamt of applying
the word Estate to the land itself
So Bacon says : — " Property of lands by conveyance is first
distributed into Estates, for years, for life, in tail, and fee simple.
These Estates are created by word, by writing, or by record "
An Estate is, therefore, always a Bight of an order inferior to
Property: it, in reality, means a Lease: as Bacon says : — "For
Estates for years which are commonly called Leases for years.
Such interests, or Estates, in land were always given as the fee or
reward for services rendered to the Crown." So, Bacon also
says :— " The last and greatest Estate in lands is fee simple, and
beyond this there is none of the former for lives, years, or entails,
but beyond them is fee simple. For it is the greatest, last, and
uttermost degree of Estates in land"
The true meaning of Estate is, therefore, a Lease or Bight to
use a thing derived from a higher power, for which some service
is given : which {^feudal property : and an Estate in fee simple
means a perpetual lease of lands or tenements, and is, in strictness,
only applicable to land
The true meaning of the word Estate is also shown in the
Tempesfy where Iris says : —
"A contract of true love, to celebrate,
And some donation freely to Estate
On the blessed lovers "
So, -^geus in Midsummer NighVs Dreamy says : —
" And all my Right of her
I do Estate unto Demetrius "
So, in As You Like It, Oliver says : —
"All the revenue that was old Sir Oliver's will I Estate upon you"
44 THEORY OF CREDIT
So, a person's Estate is anything whatever to which he has a
Right, or Interest : whether it be lands, houses, jewelr}', money,
cattle, debts, the funds, shares, copyrights, patents, or any other
property whatever
Farm : another example is the word Farm. Most persons are
accustomed to consider that a Farm is a piece of land : and that
a good Farmer is a good agriculturist : and that to farm well
means to till the land well. All this, however, is an error. The
word Farm, like Estate, means a Lease. It is called Farm from
Firmus, fixed. Whenever a person takes a Lease of anything
capable of yielding profits, and upon agreeing to pay a fixed sum,
he is allowed to appropriate all the remaining profits to himself ,-it
is termed a Farm. Thus, in many countries, it used to be the
custom to farm the taxes. The words Farm and Estate, therefore,
simply mean Leases : and are, in reality Bights
Tithes : so Tithes are not the produce of the land, or flocks, or
personal industries to which the parson has the Eight : but the
Bight itself to demand the produce
Bent : so the word Rent does not mean the money, or the
produce itself, paid for the use of lands, houses, and other things.
Rent, or reditus, is the Bight which the owner of such things has
to demand compensation for their use from the person to whom
their use is granted. It is a mere Annuity, a Right, to demand a
series of payments for the continuous use of these things.
Formerly the Right to receive interest for money lent was also
called Rent. So on the Continent the Funds are still called
Rentes
Annuity : so the word Annuity does not mean the sums of
money periodically paid : but the Right to demand them : and is
a property quite separate from the money actually paid
Funds : This is a popular name for the Bights which persons
have to receive annual payments for money they have advanced to
the state. This, however, is a mere popular name : the legal name
is Bank Annuities
WEALTH IS AX EXCHANGEABLE RIGHT 45
Credit or Debt : so a Credit or Debt is the Bight which a
person has to demand a sum of money from another person :
and not the Money itself which is due
Shares in Commercial Companies are the Rights which the
persons who have subscribed to the Capital have to participate in
the profits earned by the company
So, a Fishery, Shootings, Turbary, Tolls, Ferries, &c., arelpOTrV; r.
Rights to actual fish, game, turves, moneys: but the Rightdvtoi^/ ^"^^Tx
receive them ^'
Wealth in Economics is an Exchangeable Right
26. It follows from the preceding considerations that the
true definition of Wealth in Economics is : an Exchangeable Right
Now, there are Three kinds of Rights, or Property, which can
be bought and sold; or- exchanged: or whose Value can be
measured in Money
1. Corporeal, or Material Property, or Rights. There may
be the Right, or Property, in some specific material substance
which has already come into existence : and has come into the
actual possession of the owner. This species of Property in
Roman and English Law is termed Corporeal Property : because
it is the Right to some specific corpus. It is also called Material
Property: because it is the Right to certain specific Matter.
Henc^, we term this species of Property Corporeal or Material
Wealth
2. Immaterial Property. The Property which a man has
in his own mental and intellectual Qualities : in his own Labor :
or in his capacity to render any sort of Service. As Smith says—
*'The Property which every man has in his own Labor, as it is the
original foundation of all other Property, so it is the most sacred
and inviolable "
Now a person may sell the Right to demand some Labor or
Service from him. As all these services, though they require some
bodily instrument to give effect to them, are, in reality, operations
of the mind, we may call them Immaterial Property : or Imma-
terial Wealth : as J. B. Say, the French Economist does
46 THEORY OF CREDIT
3. Incorporeal Property. There is, lastly, a third kind of
Property, or Eight, wholly separated and severed from any specific
corpus, or matter in possession. It may either be in the possession
of some one else at the present time : and may only come into
our possession at some future time : or it may be even not in
existence at the present time
Thus,, we may have the Right, or Property, to demand a sum
of money from some pei-son at a future time. That sum of money
may, no doubt, be in existence at the present time : but it is not
in our possession : it may not even be in the present possession of
the person bound to pay it. It may pass through any number of
hands before it is paid to us. But yet our Right to demand it at
the proper time is present and existing : and we may sell, or
transfer, that Right to any one else for money
We may also have the Right to something which is not yet
even in existence : but will only come into existence at a future
time
Thus, those who possess lands, cattle, fruit trees, &c., have the
Right, or Property, in their future produce. This produce is not
in existence at the present time : it will only come into existence
at a future time : but the Bight, or Property, to it when it does
come into existence is present and existing : and may be bought
and sold like the Right to any material product. This species of
Property is called, in Roman Law and English Law, Incorporeal
Property : because it is a Right, but separated from any specific
corpus. Hence it is called Incorporeal Wealth
But all these three different kinds of Rights possess the Quality
of Exchangeability : they can all be equally bought and sold,
or exchanged : their value can all be measured in money : they
are all equally merchandise, or articles of commerce. They are
therefore Pecunia^ Ees, Bona, Merx : xRVt^o-Ta, irpdy/jLara, oikos,
dyaOa, ova-la : goods, goods and chattels, vendible commodities,
in the Jurisprudence of all nations
And as it is the Quality of Exchangeability which alone
constitutes anything Wealth : and is the sole quality which
Economics regards : it follows that all these Three kinds of
Rights are equally Wealth in Economics : and all the fundamental
concepts or definitions, and all the Laws of Economics must be
H
OVERTHROW OF LUCRETIUS 47
enlarged and generalised so as to comprehend indifferently the
exchanges of these three Orders of Rights
Reply to the Dogma of the Economists that Immaterial and
Incorporeal Quantities are not to he admitted to he Wealth
27. 1. We have shown that the Economists steadfastly
refused to admit that Labor and Credit are Wealth ; because they
alleged that to term them Wealth, would be to maintain that
Wealth can be created out of Nothing
But we have also shown that ancient writers unanimously held
that Labor and Credit are Wealth — and that modern writers now
also unanimously hold that Labor and Credit are Wealth — in total
defiance of the dogma that Nothing can come out of Nothing
It has also been shown that according to the Laws of Natural
Philosophy, the Economists were in error in excluding Labor and
Credit from the title of Wealth : and that ancient and modern
writers are right
Nevertheless there are still some people who feel a difficulty
on the subject, and are somewhat startled at the idea that Wealth
can be created out of Nothing. We shall see what a facile answ^er
can be given to the dogma of the Economists, by the considerations
we have presented
The real difficulty which impedes the true apprehension of the
subject, is very similar to that which for a long time obstructed the
reception of the Newtonian Theory of Gravitation on the Continent
It had long been laid down as an incontrovertible dogma, that
a hody cannot act where it is not
When, therefore, the Newtonian doctrine of central forces was
published, showing that the motions of the planets may all be
accounted for by certain forces emanating from the sun and
themselves, the opponents of the system maintained that it violated
the fundamental dogma that a body cannot act where it is not.
And several of the most eminent continental philosophers, Leibniz,
Huyghens, the Bernouillis, and the French Mathematicians, who
were all followers of the Cartesian vortices, long refused to receive
the Newtonian Theory of Gravitation on that account
48 THEORY OF CREDIT
A similar diflicalty is at the root of the difficulty which the
Economists, and some modern writers, feel in admitting Labor and
Credit to be Wealth
Many thonsands of years ago a materialistic philosophy sprang
up on the banks of the Ganges. Eapila is said to have been
the author of the Sankhya Philosophy, and to have invented the
dogma Nothing can come out of Nothing. This Philosophy
migrated from the banks of the Ganges to those of the Ilissns
and the Tiber ; and is familiar to us under the names of Lencippus,
Anaxagoras, Democritus, Epicurus, Lucretius and scores of others
The fundamental dogma of Lucretius, the hierophant of the
materialistic philosophy, is, that No Thing can come out of Nothing
-De Rpr. Nat,, L, 151 : 205.
'^ Nullam Bern e Nihilo gigni divinitus unquam ''
" The Deity never yet made Any Thing out of Nothing "
" Nil igitnr fieri de Nilo posse fatendumst"
" It must therefore he allowed that Nothing can he created out of
Nothing"
Moreover, that No Thing can go hack into Nothing, I., 216, &c.
" Hue accedit uti quaeque in sua Corpora rnrsum
Dissolvat Natura, neque ad Nihilum interimat Bes "
" Bence, itfolloivs that Nature resolves all thiiigs into their own
elements; and does 7wt destroy Things into Nothing"
"NuUius exitium patitur Natura videri"
Nature does not suffer the annihilation of anything to he seen
" Immortali sunt natura prasdita certe
Hand igitur possunt ad Nilum quasquereverti "
They are, therefore, endowed tvith an immortal nature. There*
fore J things cannot revert into nothing
*^ Hand igitur redit ad Nihilum Res uUa, sed omnes
Discidio redeunt in corpora material "
Therefore, Any Thing cannot go hack into Nothing, hut allj
when destroyed, return into the eUments of matter
" Haud igitur penitus pereunt quaecunque videntur
Quando alid ex alio reficit natura, nee uUam
Bem gigni patitur^ nisi morte adjutum aliena "
t50 THEORY OF CREDIT
Res, Pecunia, Bona, Merx : ^TJfiaray Tr/xfyftara, oTkos, ovo-to,
ouo-tia dc^aViys. Goods, Goods and Chattels, Chattels, Incorporeal
Things; Incorporeal Wealth
It is true that many Economists have declared that man can
create nothing, and that all Wealth comes from the earth. But
Smith, Say, Senior and Mill, and all other Economists of note,
now unanimously class Personal Qualities as Wealth : and Labor
as a vendible commodity
All modern Economists of note are now agreed that the ancients
were right in holding that Exchangeability is the sole essence and
principle of Wealth : that whatever can be bought and sold, or
exchanged : anything, whatever, whose Value can be measured in
Money : is Wealth. Twenty-two centuries ago the author of the
Eryxias irrefragibly proved that Knowledge is Wealth
Knowledge, therefore, by the very generality of the definition,
and the consent of every Economist of note, is Wealth. And
where does knowledge come from ? And what is it formed out of ?
Does it come from the earth ? And is it formed out of the materials
of the globe ? All that we know is that knowledge originates in
the mind. Knowledge is formed in the mind : by great Labor
very often ? But it is formed out of the materials of the mind ?
And, if so, what is the Mind composed of? Does it come from
the earth ? Are we to have an atomic theory of the mind and of
Knowledge ? Will some metaphysical Dalton revive the doctrine
of Lucretius and the Stoics that knowledge and the Human Mind
are composed of indestructible primordial atoms ?
TToAAa ra 8eiva, kovScv avOpiLirov Seivorepov TreXct
But this same knowledge — Whence cometh it ? What is it ?
Whither goeth it ?
AYe know not — do our readers ? Natheless, it is Wealth :
and, therefore, it is within the domain of the Economist. It
may be bought and sold : it may be Valued in Money : it may be
handed down from age to age : like any material chattel. It is
the produce of Labor
The acquisition of Knowledge is the acquisition of Wealth :
and the loss of Knowledge is the loss or destruction of Wealth.
And is the loss or destruction of Knowledge the dissolution of
indestructible primordial atoms ?
t
r
IMMATERIAL QUANTITIES AS RES 51
Here, then, we have vast masses of Wealth : and the question
is, where does it come from ? And what is it composed of ?
And there can be but two answers to the question. Either
Knowledge is composed of indestructible primordial atoms, or it
is not. If it be so, then the formation of Knowledge is not the
creation of Wealth out of Nothing. But unless we are prepared
to admit that — and who is ? — the formation of Knowledge must
be the creation of Wealth out of Nothing. And the loss or
destiniction of Knowledge must be the Decreation, the Annihila-
tion, or the Return of Wealth into Nothing
As one example of this, out of thousauds, we may take a case
that was before the Scotch Courts some years ago. In the
17th century, a man, named Anderson, discovered a way of making
pills, which soon became very popular. The secret of making
these pills has been handed down from generation to generation,
and has been a constant source of wealth to the possessors of it.
Some years ago the owner of it became bankrupt, and his creditors
claimed the right of having it given up to them, as part of the
bankrupt's assets. The pills have been analysed in vain by
chemists, and the secret of their composition has never been able
to be discovered
Now, here is a manifest case of trade secret — Knowledge —
being Wealth, and where did this Knowledge, or Wealth, come
from ? And what is it composed of ? Did it come from the earth ?
And is it composed of the materials of the Globe ? And yet it
has been handed down as an heirloom from age to age. If the
owner of the secret died without divulging it, there would be a
manifest loss of Wealth. And what would become of it in that
case ? Would it be resolved into undying atoms ? And this is
only a particular example out of countless others. Trade secrets
are expressly held in Law to be partnership assets
Now, Knowledge is Wealth — and Knowledge is a Res. And
here we have enormous masses of Knowledge — enormous masses
of Res — which are created out of Nothing — and, if lost, may go
back into Nothing, which entirely overthrows the doctrines of
Lucretius, and the Physical Philosophers, that No Thing can be
created out of Nothing, and that No Thing can go back into
Nothing
e2
I
t
52 TPIEORY OF CREDIT
The doctrines of the Economists who maintain that all Wealth
conies from the earth, and is formed out of the materials of the
globe, are also overthrown; and who maintain that man can create
No Things. For, here we have vast masses of Wealth which do
not come from the earth, and are created by man
Hence it is evident that there is another source of Wealth
besides the earth ; namely the Human Mind
Moreover, Personal Credit — ^the Credit of our Merchants,
Bankers, Traders, of the State, and other Public Bodies — was
shown by Demosthenes, and is allowed by all modern Economists,
to be Wealth. It is also termed by all Jurists a Bes. And
is this Personal Credit — this Wealth — this Res— composed of
indestructible primordial atoms ? and formed out of the materials
of the globe ?
On Incorporeal Quantities as Bes, or Wealth
27. 8. But the third Order of Economic Quantities —
Abstract Eights — do not originate in the Earth, nor yet in the
Mind. And here Lucretius is again at fault. For he says that
there is No Thing beside the Void which is separated from some
Corpus
'• Omnis ut est igitur per se Natura duabus
Consistit Rebus : nam Corpora sunt et Inane "
'* Therefore, all Nature, as it exists, is constituted of two Things :
for there are Corporeal Things, and there is the Void '*
** Praeterea nihil est quod possis dicere ab omni
Corpore sejunctum: secretumque esse ab Inani "
" Besides, there is Nothing which you could say is separated
from any Body : and distinct from the Void, which would, as it
were, count as the discovery of a third Nature "
" Et facere et fungi sine corpore Nulla potest Bes "
" And No Thing can act and function without a Body "
** Ergo praster Inane et Corpora, tertia per se
Nulla potest Rerum in numero Natura relinqui
Nee quae sub seusus cadat ullo tempore nostros
Nee ratione animi quam quisquam possit apisci *'
ippi^^^^
INCORPOREAL QUANTITIES AS RES 53
" Therefore^ besides the Void and Bodies no third Nature can
he left to he counted among Things which can either he recognised
hy the senses : or which any one can grasp hy the reason of his
mind "
From these lines it is clear that Lncretiiis did not apprehend
the nature of Bights of action, Debts, Bills of Exchange, and
other kinds of Incorporeal Property, or he would have found it
necessary to modify this part of his philosophy
If Lucretius had shown his poem to his friend Cicero before
his death, he would have smiled. He would have taken a Bill of
Exchange out of his desk, and said — ^' My friend Lucretius, you
say that No Thing can exist separate from a body, nor act nor
function without a body. Now, my son is going to Athens to-
morrow, and as it would not be safe for him to carry Money along
with him, I have got from my banker in the forum, a Bill of
Exchange on Athens. This Bill of Exchange is a simple Eight
of action — it is a Res— and yet it was created out of Nothing by
my banker at my request. It is what we lawyers call a Res
Incorporalis, which, you maintain, cannot exist in the nature of
things. When my son presents his Bill to the banker at Athens,
he will give him the sum for which it is payable. Therefore, you
see, that it acts and functions without a body : and hence, my
friend, your doctrine that there is no third Thing in nature besides
Bodies and the Void : and that No Thing can act and function
without a Body, requires reconsideration. If you will come to
myself, or to Hortensius, and have a little chat with us, we will tell
you that Abstract Rights of different sorts are termed, in our law,
Bes Incorporales. What, then, becomes of your doctrine that
there can be no Res without a corpus ? and, that there is no third
thing besides Corpora and the Void ? Now, v^rlien I asked my
banker to give me this Bill of Exchange, which is a Res — what
was it created out of ? Thus, you will see that a Res can be
created out of Nothing. And, when the banker at Athens pays
it, it will be extinguished : it will be annihilated : it will go back
into Nothing. Now, you see that this Res was created out of
Nothing, and that it can go back into Nothing. I advise you to
take back your poem and expunge that part of it, or you will have
all the lawyers in the forum laughing at you."
i
54 THEORY OF CREDIT
Now, all these Abstract Rights are Wealth : they are
they are expressly termed Bes Incorporales in Eoman Law : and
Incorporeal Chattels in English Law. And what are they created
out of ? Do they come from the materials of the globe ? Are
they formed out of indestructible primordial atoms ? When a
Debt is extinguished and annihilated, is it resolved into indestruc-
tible atoms to re-appear under another form ? What becomes
then of the doctrine that No Thing can be created out of
Nothing : and that No Thing can go back into Nothing. As
a matter of fact 98 per cent, of commerce in this country is
carried on by circulating Debts — circulating Bes. What, then,
becomes of the doctrine that No Thing can act and function
without a Body?
How is a Debt created ? By the mutual consent of two
Minds ? By the mere fiat of the Human WilL And how is a Debt
extinguished ? When two persons have agreed to create a Debt —
whence does it come ? Is it extracted from the materials of the
globe ? No I it is a valuable product, created out of the Absolute
Nothing, by the mere fiat of the Human Will. And, when it is
extinguished, it is a valuable product Decreated into Nothing, by
the mere fiat of the Human Will
Hence, we observe, that there is a third source of Wealth
besides the Earth and the Human Mind, namely the Human WilL
And far the largest portionof Economic Quantities in this country
is merely the creation of the Human Will
Credit in Economics is very much analogous to Gravity in
mechanics. Gravity is force, pure and simple, dissociated from
any material agency: and, for some time, some eminent men felt
a difficulty in believing in it for that reason. Now, Credit is
Exchangeability, pure and simple, dissociated from Labor and
Materiality, and, therefore, some persons even yet feel a difficulty
in believing it to be Wealth. But Credit is Wealth just as Gravity
is force
We now perceive the advantage of removing all notions of
Labor and Materiality from the definition of Wealth : and adopting
Exchangeability, pure and simple, as the sole essence and principle
of Wealth : and defining Wealth to be exclusively an Exchange-
able Right
JURISPRUDENCE IS THE SCIENCE OF RIGHTS 55
"We now see the answer to the Doctrine of the Economists,
that all Wealth must be material, and formed out of the materials
of the globe, because No Things can come out of Nothing
We say that we are not concerned with material substances at
ail — but only with the Bights to them. Jurisprudence and
Economics have nothing to do with physical substances ; but only
with the Rights to them. Some philosophers deny the existence
of a Deity : other philosophers deny the existence of matter : but
no philosopher will ever have the hardihood to deny that men can
create : sell or exchange : and annihilate Eights : and we see that
Wealth is nothing but Szchangeable Rights
Jurisprudence is the Science of Rights
I
28. Several eminent Jurists have observed that Jurisprudence
is the Science which treats exclusively about Rights, When a
person has the Property in anything, it is necessarily implied
that every one else is prohibited from infringing his Right
of enjoying his Property uninjured : and if any one infringes
this legal Right, the Proprietor has an action against the wrong- ;,'
doer It
Jurisprudence consists in ascertaining, defining, protecting, J
and transferring Rights. Ortolan observes that Jurisprudence I
has nothing to do with the things themselves, but only with the
Rights to them. So Lord Mackenzie says * — " Natural Philosophy I
considers things, according to their physical properties : Law •;
regards them as the objects of Rights " \
An Iiyury (Injttria) is the infringement of a l^al Right. ;
In all actions for damages the action is not for the damage done I
to the thing itself; but for the Infringement of the owner's ' *
legal Right to enjoy the thing itself in a perfect state
If I drive my carriage against the carriage of another person
and damage it, the action does not lie for the damage done to the
carriage itself ; but for the Infringement of the owner's legal
Right {Injuria) to enjoy the carriage in a perfect state
If there is no Right in the thing, there can be no Injury or
Infringement of a legal Right, and therefore no Right of action
* Boman Law, p. 54
56 THEORY OF CREDIT
In many cases one person may damage another person's
Property, without any Injury, or Infringement of a legal Right.
If one j)erson keeps an hotel or a shop, another person may set up
a rival hotel or shop, and draw away custom from his rival.
This may be a damage done to the Property of the first person :
but it is not an Injury, or the Infringement of a legal Right :
because one person has as much Right to keep an hotel or a shop
as another : and the public has the Right to go to which hotel or
shop they please
So if one pei'son writes a book on any subject, any one else
has an equal Right to write a better one on the same subject if he
can : and so he may damage the sale of the first : but it is no
Injury or Infringement of a legal Right. The public has the
right of choice between the rival books, and if it chooses to prefer
one to the other, it is no injuiy
In these, and in innumerable other cases of a similar nature
the damage done is termed damnum absque wjurid : because it is
a damage done, but it is not the infringement of a legal Right :
and it is not the ground of any Right of action
So a banker's, a merchant's, or a trader's mercantile character,
or Credit, as it is termed, is his Property : it is a Jus in rem :
and if any one spreads slanderous reports about it, it damages his
Power of Purchasing, or Wealth, which is a serious injury, and is
the ground of an action
Economics, or Commerce, is the Science of the Szchanges of
Rights
29. We have found that the true meaning of Wealth in
Economics, is an Exchangeable Right: and that there are
Three orders of these Exchangeable Rights : hence these three
orders of Rights may be exchanged in Six diflPerent ways
1. The Right, or Property, in a material thing may be
exchanged for the Right or Property in another material thing
As when the Property in so much Gold is exchanged
for the Property in so much corn, or cattle, timber, lands,
horses, &c.
2. The Right, or Property, in a material thing may be
exchanged for the Right to demand so much Labor or Service
MEANING OF PERSONA IN ROMAN LAW 57
As when the Property in so much Gold is exchanged for the
Right to demand so much •Labor in any form
3. The Right, or Property, in a material thing may be
exchanged for the Right to an abstract Right
As when the Property in so much Gold is exchanged for the
Right to a Bank Note, Bill of Exchange, Cheque : the Funds ;
or any other Incorporeal Property
4. The Right, or Property, in so much Labor, or Service,
may be exchanged for the Right to demand so much Labor, or
Service, of another kind
As when persons agree to perform reciprocal services for each
other, which are estimated as equivalent
5. The Right, or Property, to demand so much Labor,
or Service, may be exchanged for the Right to an abstract
Right
As when Labor, or Service, of any kind is paid for in Bank
Notes, Cheques, or Bills
6. The Right, or Property, in one abstract Right may be
exchanged for the Right to another abstract Right
As when a banker buys, or discounts, a Bill of Exchange,
which is an abstract Right, by giving in exchange for it a Credit
in his books, which is another abstract Right
Thus it is seen that all Exchanges are of Rights against
Rights : and these six kinds of the Exchanges of Rights consti-
tute the Science of Commerce : or of Pure Economics
On the Meaning of Persona in Roman Law
30. It will be very useful to understand the meaning of
Persona in Roman Law
The word Persona means any single Person, or any Society of
Persons, who can enjoy and exercise Rights, and who are subject
to perform Duties
Thus, in a Partnership, each individual member is a Persona :
bnt, also, the Partnership is a Persona^ quite separate and distinct
from its individual members
Hence each member of the Partnership can buy and sell with
the Partnership as a separate individual
58 THEORY OP CREDIT
So, a Joint Stock Company is a Persona, and when the
individual members pay their money to it, the Property in the
money is gone from them individually, and vests in the Company
as a Persona
The separate members can bay and sell with the Company as
with a separate individual
And so the Company has Bights and Duties qnite separate
from its separate members
So, the State is a Persona, quite separate from its individual
citizens ; and they can lend money to the State as a separate person
So, every Municipal, or Incorporated Body, is a Persona quite
separate from its separate members
The Parson of the parish is the Persona who has the right to
receive certain dues for performing religious duties : and this
Bight is termed a benefice
Thus, a Persona may be defined as a centre of Bights and
Duties
Many separate individuals may make up one juridical Persona ;
and one individual may combine several Persona y or legal
characters
Thus, one individual may be the executor of one person :
trustee of another : guardian of another : in each of these he is a
separate Persona, or legal character, with a distinct set of Bights
and Duties. And he may buy and sell, or exchange with himself
in these separate Persona, or characters. Hence all exchanges
take place between separate Persona
Moreover, he can come into legal collision with himself in
consequence of fulfilling these " several characters, of which we
may give an amusing instance —
The right of salmon fishing is a sore subject with Scotch
littoral proprietors. Salmon is claimed as a royal fish in Scotland.
On one occasion a great Scottish proprietor found himself in
collision with the Crown on the subject of salmon rights. The
action was against the President of the Boai-d of Trade. But, in
the whirligig of politics, the noble Duke found himself President
of the Board of Trade, so, that the Duke, as a great salmon
proprietor, found himself suing himself as President of the Board
of Trade, and guardian of the interests of the Crown
MEANING OF RES IN ROMAN LAW 59
Many amusing stories are told of Indian officials, who fill
several offices, finding themselves in collision with* themselves as
to the Rights and Duties of their several offices, and carrying on
a hostile correspondence with themselves
So, one individual may be both a Creditor and a Debtor. He
is an active agent as regards his Debtor : and a passive agent as
regards his Creditor
But his Creditor may put his Debt against him into circulation ;
and, in process of time, his debt against himself may come into
his own hands. Hence he will be both Creditor to himself and
Debtor to himself
This is called Confusio in Soman Law: and will be considered
more at length hereafter
On the Meaning of Bes in Roman Law
31. As Persona means any person, single or corporate, which can
enjoy and exercise Rights, and is subject to Duties; so Res, in Roman
Law, means anything whatever which can be the subject of a Right
Thus, material things are subject to Rights, or Property ; and
they are termed Res Corporales : because they are Rights clothed
with a corpus
But, also, a person may have the Right to receive some
payment or profit at a future time
The future payment or profit may not have come into possession ;
and it may not even have come into existence ; but yet the Right
to it has a present existence
These abstract Rights to receive future payments or profits are
termed Res Incorporales in Roman Law : because they are Rights ;
but not clothed with any corpus
In recent times these Incorporeal Rights have increased in
magnitude, and multiplied in kind, to an enormous extent, and
increased at a much greater ratio than Corporeal Property
Res is anything whatever to which a person has a Right. Now,
a man has a Right, or Property, in his own Labor : and he can
sell the right to demand some Labor from him : and so that other
person acquires the right to demand so much service from him.
Hence, Labor and Service are subjects of a Right : and, therefore,
they are expressly included under Res in Roman Law
60 THEORY OF CREDIT
Moreover, a person has the Right to enjoy his character
uninjured ; hence, personal character is a Jus in rem
A banker, or a merchant, has the Right to enjoj his Personal
Credit uninjured
A banker's, or a merchant's, Personal Credit, is a part of his
Purchasing Power, or Wealth : just as the Labor of the working
man is his Purchasing Power, or Wealth : and it is just as great a
crime to rob a banker or a merchant of his Credit, as to rob them
of their money. Hence, Personal Credit is a Res
On ihe Distinction between Rights to Specific Things : or Jura
in rem or in re : and Rights against Persons : or Jura in
Personam, or ad rem
32. We have now to notice a distinction between different
kinds of Property, or Rights, of the greatest importance in
Economics
Property, or Rights, are of two sorts —
(1). The Property or Right to some specific chattel : termed
in Law a Jus in rem or in re : without being related to any one
else : this Right is termed in Roman Law, Dominium
When a person has such a Property, or such sole and exclusive
Right, in any Chattel, he can sell it to any one he pleases.
Money, cattle, timber, and other material goods are subject to
this kind of Property
(2), Property or Rights held in Contract or Obligation :
that is when a person has not the Right to any specific chattel :
but only the Right against a Person to compel him to pay or do
something. This Right is termed a Credit or a Debt. It is
termed in Roman Law a Jus in Personam : or a Jus ad rem
(acquirendam)
A simple example of this kind of Right is the Contract, or
Obligation, of Debt. In this case the Creditor has no Right to
any specific Money in the Debtor's possession : but only a Right
of action to compel the Debtor to pay to him a sum of money.
And the Right of the Creditor against the Debtor exists whether
the Debtor has any money to pay his Debt, or not
JURA IN REM AND IN PERSONAM . 61
To this class of Rights belong all instruments of Credit, such
as Bank Notes, Cheques, Bills of Exchange and all Securities for
Money : the Funds : Municipal Obligations: Rents of all kinds :
of houses, farms, copyrights, patents, pews, telegraph wires,
mines : or Rents payable in services
The former class of Rights are called Real, or Corporeal,
Rights or Property ; because they are always Rights to specific
chattels
The latter are called Personal, or Incorporeal, Rights, because
they are merely abstract Rights against a Person : wholly severed
from any specific chattels
Thus in Corporeal Property the Right and the specific corpus
cannot be separated : they cannot be sold separately and inde-
pendently of each other : they must always go together : hence
the Right and the corpus form but one Property
But in Incorporeal Property the Right is absolutely severed
from any specific corpus. This class of Rights may be bought
and sold separately and independently of any specific corpus : in
all respects like Money. This class of Property, therefore, and
the Money they may be paid in, form two Properties, which may
be bought and sold separately
And when this class of Property is paid in Money, by the
Person whose duty it is to do so, it is always an Exchange : the
Debtor exchanges the money for the Right of action : and by so
doing the Right of action is extinguished, and ceases to exist
But as the whole class of Rights to specific chattels : and the
whole class of Rights against Persons : can be bought and sold,
or exchanged : and the Value of each class of Rights can be
measured in Money : they are, each of them, Fecunia, ReSy Bona,
Merx : xfyrifiara, irpdyfiaTa, ttA-ovtos, ovtria, otKos, dyaOdy &C.:
Goods, Goods and Chattels : Chattels : vendible commodities :
Wealth
The want of knowledge of this vital principle has been the
cause of immense misconception and error in Economics
62 , THEORY OF CREDIT
Thus Mill in his Preliminary Remarks maintains that the
Funds are not Wealth, because they resemble a Moitgage Deed :
and though they may be Wealth to the Mortgagee, they are sub-
tracted from the property of the Mortgagor
Now, this is a vital and most important error. The Funds
and a Mortgage Deed belong to two distinct classes of Property
The Funds are Jura in Personam : they are mere abstract
Rights to demand a series of payments from the Persona of the
State : they are Incorporeal Property
But a Mortgage Deed is the Right to a specific thing, such as
a piece of land, house, or anything else. When a person
mortgages his house or lands, he actually sells the house or land
to the mortgagee, and then they become his actual and legal
Property. What the Mortgagor has is the Right to repurchase
the house or land, when he pays off the loan. Thus a Mortgage
Deed is a Jus in rem or in re : it is Corporeal Property
Thus the Funds are not a Mortgage Deed on the Property of
the country, as Mill and so many others contend : they are a
charge on the future income of the nation : and the earnings of
the industrial classes are as much pledged, and contribute to the
payment of the Funds, exactly in the same way as the income of
those who hold real Property
The Funds are in fact a Bill of Exchange payable out of the
income of the country by instalments for ever
To compare the Funds to a -Mortgage Deed is exactly the
same error as to suppose that when a merchant has accepted a
Bill of Exchange, he has thereby granted a mortgage on his lands
or house
Many writera also, seeing that certain Paper Documents, such
as Bank Notes, Cheques, and Bills of Exchange ; Bills of Lading
and Dock warrants ; circulate in commerce, consider that they
are of the same nature, and class them all under the denomination
of Credit
This, however, is a most vital error : Bills of Lading and
Dock Warrants are all Titles to specific goods, and cannot be
separated from them. They are only one Property with the
DEFINITION OF VALUE 63
goods : and always travel along with them. They are all Jura in
re, or Corporeal Property. They are termed in Law Documents
of Title
But Bank Notes, Cheques, Bills of Exchange, &c., are merely
abstract Rights of action against Persons. They are all Jura in
personam: or Incorporeal Property. They have no relation to
the Money they may ultimately be paid in
Thus Bank Notes, Cheques, Bills of Exchange, &c., are
independent Property : and they are exchanged against goods —
exactly like Money. They are Credit: and in Law they are
termed Valuable Securities
We shall see afterwards that many literary and mathematical
writers have totally misconceived the nature and effects of Credit,
because they have confounded the distinction between Bills of
Exchange and Bills of Lading
Definition of Value
33. Value, as will be shown more fully in the next chapter,
is an affection of the mind, or a desire to possess some external
object
It is the Value, or the- Desire of two persons, each to obtain
some object which is the Property of the other, which produces
an exchange, or an act of commerce
Economic Quantities are, as we have seen, of three distinct
orders, any one of which may be exchanged against any other
Now, if, at any time, the Proprietors of any two objects agree
to exchange them : then each of these two Quantities is termed
The Value of the other
Suppose that at any time one ounce of Gold will exchange for
18 ounces of silver: then it is said that one ounce of gold is of
the Valm of 18 ounces of silver, which is simply this equation —
1 oz. Gold = 18 oz. Silver
Hence Value may be termed the Sign of Equality between
any two Economic Quantities
We have then this Definition —
The Value of any Economic Quantity is any other Economic
Quality f 01' which it can be exchanged
64 THEORY OF CREDIT
Hence any Economic Qaantity has as many Values as other
Economic Quantities it can be exchanged for : and, of course, if
it can be exchanged for nothing, it has no Value
Value, then, by the definition, requires two objects : just as
Distance and a Ratio require two objects. A single object
cannot have Value : any more than a single object can be Distant
or Equal. If we are told that any object is Distant or Equal :
we immediately ask Distant from what ? or Equal to what ?
So if it be said that a Quantity has Value we must ask —
Value in what ?
It is also clear that as it is absurd to speak of a Quantity
having Absolute, or Intrinsic, Distance, or Equality : so it is
equally absurd to speak of a Quantity having Absolute, or
Intrinsic, Value
On Money and Credit
34. 1. In the early ages of the world there was no such
thing as Money. When persons traded they exchanged the pro-
ducts directly against each other : as is the custom at the present
day with savage people
Thus in Iliad vii., 468, we have —
*' N^cs KIk AyjfivoLo irap^(TTa(Tav olvov ayovcrat
** €vO€v ap olvL^ovTO Koiprj Ko/i.oa)vr€$ *A;^aiot,
aXXoL fJi€v )(aX.)((a, aAAoc SaiOfavi, criSiypw,
aAAot 8c pivoi^y aXKoi B^avrgo'L )Soccr(rtv,
aAAoi 8'av8/oa7ro8ccrcrt '
" From Lemnos' isle a numeroas fleet had come
Freighted with wine
All the other Greeks
Hastened to purchase, some with brass and some
With gleaming iron : some with hides,
Cattle and slaves "
This exchange of products against products is termed Barter :
and the inconveniences of this mode of trading are obvious.
What haggling and bargaining it would require to determine
how much leather should be given for how much wine ! how-
many oxen, or how many slaves !
ON THE NECESSITY FOR MONET 65
_ «
In the Homeric poems there is not the faintest allasion to
anything of the nature of Money. Bat even in those days some
ingenious person had discovered that it would greatly facilitate
commerce if the products to be exchanged were referred to some
common measure of Value
There are several passages in the Iliad which show that while
traffic had not advanced beyond Barter, such a standard of
reference was used. We find that various things were frequently
estimated as being worth so many oxen. Thus in Iliad, ii., 448,
Fallas's shield, the ^gis, had one hundred tassels, each of the
value of one hundred oxen. In Iliad vi., 234, Homer laughs at
the folly of Glaucus, who exchanged his golden armour, worth
one hundred oxen, for the bronze armour of Diomede, worth
nine oxen. In Iliad xxiii., 703, Achilles offers as a prize to
the winner in the funeral games in honor of Patroclus, a large
tripod, which the Greeks valued among themselves at twelve
oxen : and to the loser, a female slave, which they valued at
four oxen
But it must be observed that these oxen did not pass from
hand to hand like Money. The state of Barter continued : just
as at the present day it is quite common to exchange goods
according to their value in Money, without any actual Money
being used
On the Necessity for Money
34. 2. The necessity for Money arises from a different
cause. So long as the products exchanged were equal in value
there would be no need for Money. If it could always happen
that the exchanges of products or services were exactly eqnal
there would be an end of the transaction
But it would often happen that when one person required
some product or service from another person, that other person
would not require an equal product or seiTice from him in return :
or even perhaps none at all
If, then, such a transaction took place between persons with
such an Unequal result, there would remain over a certain
amount of product or service due from the one to the other
F
66 THEORY OF CREDIT
And this would constitute a Debt ; that is to say, a Right or
Property would be created in the person who had received the
less amount of product or service to demand the balance due at
some future time. And at the same time a corresponding Duty
would be created in the person of the other, who had received the
greater amount of product or service, to pay or render the balance
due when required
Now, among all nations and persons who exchange or traffic
with each other this result must inevitably happen : persons want
some product or service from others, while those others want
either not so much, or even perhaps nothing at all from them.
And it is easy to imagine the inconveniences which would arise
if persons could never get anything they wanted, unless the
persons who could supply these wants, wanted something equal
in value in return at the same time
In process of time all nations hit upon this plan : they fixed
upon a material substance which they agreed to make always
exchangeable among themselves to represent the amount of Debt
That is, if an unequal exchange took place between persons,
so leaving a balance due from one to the other : the person who
had received the greater amount of product or service gave a
quantity of this universally exchangeable merchandise to make
up the balance : so that the person who had received the lesser
amount of product or service might obtain an equivalent from
some one else
Suppose that a winedealer wants bread from a baker : but the
baker wants not so much wine, or no wine from the winedealer.
The winedealer buys the bread from the baker, and gives him ia
exchange as much wine as he wants, and makes up the balance by
giving liim an amount of this universally exchangeable merchandise
equivalent to the deficiency : and if the baker wants no wine at all,
he gives him the full equivalent of the bread in this merchandise
The baker wants, perhaps, meat or shoes, but not wine.
Having received this universally exchangeable merchandise from
the winedealer, he goes to the butcher or the shoemaker, and
obtains from them the equivalent of the bread he has sold to the
wine dealer. Hence, the satisfaction which was due to him from
the wine dealer is paid by the butcher or the shoemaker
i
TRUE NATURE OF MONEY 67
This universally exchangeable merchandise is termed Money :
and these circamsbances show its fundamental nature. Its function
is to represent the Debts which arise from unequal exchanges
among men : and to enable persons who have rendered any sort
of services to others, and have received no equivalent from them,
to preserve a record of these services, and of their Kights to
obtain an equivalent satisfaction from some one else, when they
require it
Arutoile, Bishop Ber^^hy^ the Economists, Adam Smith, Tho^-nfon^
Bastiat, Mill, and Jurists Jiave seen the true nature of Money
34. 3. The true nature of Money is now apparent. It is simply
a Bight or Title to demand some Product or Service from some one
else
Now, when a person accepts Money in exchange for products or
services rendered he can neither eat it, nor drink it, nor clothe
himself with it : nor is it any species of Economic satisfaction for
tlie service lie has done. He only agrees to accept it in exchange
for the services he has rendered, becanse he believes, or has
(*x)nfidence, that he can purchase some satisfaction which he does
require, at any time he pleases. Money is therefore what is
termed Credit
A whole series of writers from the earliest times have
perceived that the true nature of Money is merely a Bight or
Title to acquire some satisfaction from some one else, t>., a
Credit
Thus Aristotle says, Nicoraach, Ethics, B.V. :
** vir€p Se ttJs fi€Wov<rr}S aAAayiJs (ct vuv firfSkv Sctrat, on
co-rat idv StrjOfj) to vofjuafia oiov 'Eyyui/nys itrriv i^fuv. Set yap
TOVrO €f>€p0VTI. €LVai Xa^C4V "
But tin/h regard to a future excfiange (if we want nothing at
present that it may take place when we do want something)
Money is^ as it tvere, our Security. For it is necessary that he
who brings if, should he able to get what he wants "
f2
68 THEORY OF CREDIT
So a London merchant, F. Cradocke, in the time of the
Commonwealth, says — "Having now pointed out the incon-
venience of these metals (Oold and Silver) in which the medium
of commerce, or Universal Credit, hath formerly been placed . .
"Now that Credit is as good as Money will appear, it is to be
observed that Money itself is nothing but a kind of Security,
which men receive upon parting with their commodities, as a
ground of Hope or Assurance, that they shall be repaid in some
other commodity : since no man would either sell or part with
any for the best Money, but in hopes thereby to procure some
other commodities or necessary "
So an old pamphleteer in 1710, saw the same truth. He says* —
" Trade found itself unsufierably straightened and perplexed for
want of a general specie of a complete intrinsic worth as the
medium to supply the defect of exchanging, and to make good the
balance, where a nation or a market, or a merchant demands of
another a greater quantity of goods than either the buyer hath
goods to answer, or the seller hath occasion to take back "
So the great metaphysician, Bishop Berkeley says in his
Querist —
21. Whether the other things being given, as climate, soil,
&c., the wealth be not proportioned to industry, and this to the
circulation of Credit, be the Credit circulated by what Tokens or
Marks whatever ?
24. Whether the true idea of Money, as such, be not altogether
that of a Ticket, or Counter ?
25. Whether the terms crown, livre, pound sterling are not to
be considered as exponents or denominations : and whether Oold,
Silver, and Paper, are not Tickets or Counters, for reckoning,
recording and transferring such denominations ?
35. Whether Power to command the Industry of others
be not real Wealth ? And whether Money be not in truth
Tickets or Tokens, for recording and conveying such Power:
and whether it be of consequence what material the Tickets are
made of
* An Essay on Public Credit j p. 25
91
TRUE NATURE OF MONEY 69
426. Whether all circalation be not alike a circalation of
Credit, whatsoever Medium — Metal or Paper — is employed : aod
whether Gold be any more than Credit for so much Power ?
See also Queries 441, 449, 450, 459, 475, and many others
It is one of the special merits of the Economists that they
clearly saw the trne natare of Honey. Among many others
Baudeaa, one of the most eminent among them, says^ — " This
coined Money in circulation, is nothing, as I have said elsewhere,
but effective Titles on the general mass of useful and agreeable
enjoyments, which cause the well being and propagation of the
human race *'
'' It is a kind of Bill of Exchange or Order, payable at the
will of the bearer "
^^ Instead of taking his share in kind of all matters of subsis-
tence, and all raw produce annually growiug, the sovereign
demands it in Money, the effective Titles, the Order, the Bill
of Exchange, &c."
So Edmund Burke speaks of Gold and Silver as* — *' The two
great recognised species that represent the lasting Credit of
mankind "
So Smith says' — *' A guinea may be considered as a Bill for a
certain quantity of necessaries and conveniences upon all the
tradesmen in the neighbourhood "
So Henry Thornton, the eminent banker, one of the authors
of the Bullion Report, says* — " Money of every kind is an Order
for goods. It is so considered by the laborer when he receives it,
and it is almost instantly turned into money's worth. It is merely
the Instrument by which the purchasable stock of the country is
distributed with convenience and advantage among the several
members of the community "
* Introduction d la PhUosophie Economique
* Beflectioiia on the French Revolution
» Wealth of Nations, B. II., c. 2
* An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, p. 260
70 THEORY OF CREDIT
This great fandamental troth was also very clearly seen by
Bastiat. He says * — *' You have a crown piece. What does it meaa
in your hands ? It is, as it were, the witness and the proof, that
you have at some time done some work, which, instead of profiting
by, you liave allowed society to enjoy, in the person of your client.
This crown piece witnesses that you have rendered a service to
society, and, moreover, it states the Value of it. It witnesses,
besides, that you have not received back from society a real
equivalent service, as was your Right. To put it into your power
to exercise this Right when and how you please, society, by the
hands of yourclieut, has given you an Achwicledgmenl or Title,
an Order of the State, a Token, a crown piece, in short, which
does not differ from Titles of Credit, except that it carries its
Value in itself (?), and, if you can read with the eyes of the mind,
the inscription it bears, you can see distinctly these words — ^ Pay
to ihe bearer a serv^ke equivalent to that which he haa rendered to
society^ value received and stated, proved and measured by thai
which is on me '
" After that you cede your crown piece to me. Either it is
a present, or it is in exchange for something else, if you give it to
me as the price of a service. See what follows : your account as
regards the real satisfaction with society is satisfied, balanced,
closed. You rendered it a service in exchange for a crown piece,
you now restore it the crown piece in exchange for a service : so
far as regards you the account is settled. But I am now just in
the position you were in before. It is I now who have done a
service to society in your person. It is I who have become its
creditor for the value of the work which I have done for you, and
which I could devote to myself. It is into my hands, therefore,
that this Title of Credit should pass, the witness and the proof of
this social Debt. You cannot say that I am richer, because if I
have to receive something, it is because I have given something "
So again he says 2—" It is enough for a man to have rendered
services, and so to have the right to draw upou society by the
means of exchange for equivalent services. That which I call the
Means of Exchange, is Money, Bills of Exchange, Bank Notes,
' OeuvreSf Vol. II., Matidit Argent <, p. 80
^Harmonies EconomiqueSj Capital^ p. 209
i^^
TRUE NATURE OF MONEY 71
and also Bankers. Whoever has rendered a service, and has not
received an eqnal satisfaction, is the Bearer of a warrant, either
possessed of value like Money, or of Credit, like Bank Notes,
which gives him the Right to draw from society, when he likes,
and under what form he will, an equivalent service ''
So again he says^ — "T take the case of a private student.
What is he doing at Paris ? How does he live there ? It cannot
be denied that society places at his disposal food, clothiug, lodging,
amusements, books, means of instruction, a multitude of things,
in short, of which .the production would demand a long time to
be explained, and still more to be effected. And, in return for
all these things, which have required so much labor, toil,
fatigue, physical and intellectual efforts, so many transports,
inventions, commercial operations, what services has the student
rendered to society. None : he is only preparing to render some.
Why then have these millions of men who have performed
actual services, effectual and productive, abandoned to him their
fraits ?
" This is the explanation : — The father of this student who
was an advocate, a physician, or a merchant, had formerly
rendered services — it may be to the people of China — and had
received, not direct services, but, Bights to demand services, at
the time, in the place, and under the form which might suit him
the best. It is for these distant and anterior services that society
is paying to-day : and wonderful it is ! If we follow in thought
the infinite course of operations which must have taken place to
attain this result, we shall see that everyone must have been
remunerated for his pains : and that these Bights have passed
from hand to hand, sometimes in small portions, sometimes
combined, until, in the consumption of this student, the whole
has been balanced. Is not this a strange phenomenon ?
**We should shut our eyes to the light if we refused to
acknowledge that society cannot present such complicated trans-
actions, in which the civil and penal laws have so little part,
without obeying a wonderfully ingenious mechanism. This
mechanism is the object of Political Economy"
* Harmomes Economiqiiea^ Organization NatureUe, p. 25
72 THEORY OF CREDIT
So Mill says' — ** The Pounds or Shillings which a person
receives, weekly or yearly, are not what constitute his income :
they are a sort of Ticket or Order, which he can present for
payment at any shop he pleases, and which entitles him to receive
a certain Value of any commodity that he makes choice of. The
farmer pays his laborers and his landlord in these Tickets, as the
most convenient plan for himself and them "
It is BO clearly understood that Money is, in reality, nothing
more than the Bight or Title to demand something to be paid or
done, that many Jurists expressly class it under the Title of
Incorporeal Property
Thus Vulteius says —
'^ Nummus in quo non Materia ipsa^ sed Valor attenditur
*^ Money in which not the Material hut the Value is regarded
That is, we desire or demand other things for the direct
satisfaction they give us : but we only desire Money as the Means
of purchasing other things
Gold and Silver Money may, therefore, be justly termed
Metallic Credit
Thus, it is seen that writers of all classes, Philosophers,
Merchants, Bankers, Economists, and Jurists, are all perfectly
agreed upon the nature of Money. It represents Indebtedness :
or services due to the owner of it : and it represents the Bight
or Title, which its holders have to demand some product or
service in recompense for some service they have done to some
one else
On Credit
34. 4. So long as nations continue in a low state of
civilisation, all the Money, or Credit, is made of some material
substance. But when they advance in civilisation they make use
of Credit of another form
' Fnnciples of Political Economy ^ B. III., c. 4
■■
ON CREDIT 73
To revert to the case from which we showed that the necessity
for MoDe J arose out of unequal exchanges among men : suppose
that, if, instead of the general merchandise called Money, by
which the Creditor can obtain a satisfaction from some one else,
the Debtor simply gives a Promise that he himself will render
the balance due when required. Then the Creditor has also the
Right to demand an equivalent at a future time, but only from
his own Debtor
Snppose that a person holds a tea merchant's Promise to
deliver a chest of tea when required : and the tea merchant is
able to deliver the tea, it is evident that that Promise is exactly
equivalent to so much Money in that particular case
Now that Promise is ouly the Right to demand a particular
commodity from a particular person. And that person may die,
or become bankrupt : and be unable to fulfil bis promise. Hence,
the Promise is both particular and precarious. But,- so long as
the tea merchant is able to deliver the tea when required,
the tea is the Value of the Promise : and, to any one who
wants tea, the Promise is of the same Value as Money in that
particular case
This Order, or Promise, or Right, is what is usually termed
Credit, and, though it is of a lower and inferior form, it is clearly
seen that it is of the same general nature as Money
Moreover, this Right may be bought and sold, or exchanged,
exactly like Money
Suppose that a second person had performed services to a wine
merchant, and, as before, had received a Promise from him to
deliver a certain quantity of wine : then, of course, the Promise
to pay the wine would be of the value of the wine
Suppose, then, that the person who held the Promise to pay
the tea, did not happen to want tea : but did happen to want wine.
And suppose that the person who held the Promise to pay the wine,
did not happen to want the wine ; but did happen to want tea.
If those two persons met, and declared their respective wants
to each other, they might agree to exchange their respective
orders, according to the respective Value of the tea and of
the wine. Hence, each person would obtain the satisfaction he
required
74 THEORY OF CREDIT
The same also is true with respect to every other Promise to
pay any other product. An order for a shilling's worth of milk, or
bread is exactly of the valae of a shilling in these particular cases :
and so on in regard to every other product in succession. The
only difference is that each Order has only one particular Value :
while with a shilling he can get any of the products he may
require. Thus, while each Order has only one Value, a shilling
has a general Value, and can purchase any one of them
Bnt these Orders are simply so many Circulating Credits, or
Debts: and they may be interchanged among their respective
holders, in any way they please. So that a person who holds
several Orders for one thing only, may exchange them against
Orders for as many other things as he may require
Now, as in Economics, we are in no way concerned with the
materials of things ; but only with tlieir capacity of being
exchanged, or bought and sold : and, as these Orders may be
bought and sold or exchanged, exactly like any material chattels :
they are termed Pecunia, Res, Bona, Merx, in Roman Law :
y^fuiTo^ dyaOdf TrpdyyuaroL, ttXovtos, ov(tUl^ oTkos, &C., in Greek
Law : and Goods, Goods and Chattels, Vendible Commodities,
Incorporeal Chattels, and Incorporeal Wealth in English Law :
and, therefore, Wealth in Economics
From this it is seen that it is perfectly possible to carry on
the exchanges of society without material Money. During (he
great civil war in America, gold and silver Money entirely
disappeared from circulation : and private Tickets, or Orders, of
the nature described above, took its place. Instead of Metallic
Money people had their pockets filled with bread tickets, railroad
tickets, and many others. If a man had his hair cut and tendered
a dollar in payment, he could not get change in Money : but the
hairdresser gave him so many tickets promising to cut his hair
BO many times. We saw one case in an American paper in which
payment was made in tickets, or bills, promising to pay in straw-
berries when the season came on
SUBSTANCES USED AS MONEY 75
In this country it is so usaal to have Credits payable in Money
only, tliat it is sometimes supi^osed that Credits can only be
payable in Money. But, in the south of Europe, it is quite
common to make Bills payable in the products of the earth, such
as oil, currants, &c.
This seemed so novel a doctrine that we shall find hereafter
that Lord Cran worth, when Chancellor, asserted that a Bill
promising to pay in iron was not legal
On Substances used as Honey
36. The necessity for Money has arisen among all nations,
the most barbarons as well as the most civilised. As soon as the
members of any community, however barbarous, begin to exchange
among themselves, unequal exchanges must necessarily arise : and
therefore Indebtedness is created. And some substance is hit
upon to represent these services due : and the Rig^hts, which its
holders have, to demand some product or service in satisfaction of
the services they have dene to some one else
A great many different substances have been used by different
nations to represent this nni verbal want. The Hebrews, we know,
used silver. No money was used in the times of the Homeric
poems : but some time after them, though we cannot say when,
copper bars or skewers were used as money throughout Greece,
which Pheidon of Argos, in the eighth century, B.C., superseded
by silver coins. The ^Ethiopians used carved pebbles : the
Carthaginians used leather discs, with some mysterious substance
sewn up in them. Throughout the ilands of the Eastern ocean,
and in many parts of Africa, shells are still used. In Thibet, and
some parts of China, little blocks of compressed tea are used as
money. In the last century dried cod was nsed as money in
Newfoundland : sugar in the West Indies : tobacco in Virginia.
Smith says, that in his day nails were used as money in a village
in Scotland. In some of the American colonies powder and shot :
in Cam peachy, logwood : and among the North American Indians
belts of wampum were used as money. We read of another people
who nsed cowries as small change, and the skulls of their enemies
for large sums. It is said that in Virginia, in 1867, the
76 THEORY OP CREDIT
proprietors were reduced to snch straits, as to nse dried sqnirrel
skins as money. And many otiier things have been used in
Tarious oountries for the same purpose
But, when we consider the purposes for which Money is
required, it is easily seen that no substance possesses so many
advantages as a Metal. The use of Money being to preserve the
record of services due to its possessor for any future time, it is
clear that Money should not alter by time. A Money of dried
cod would not keep very long, nor would it be easily divisible.
Not many bankers would like to keep their accounts in dried cod,
tobacco, sugar, or in dead men's skulls
One of the first requisites of Money is that it should be easily
divisible into very small fragments : so that its owner should be
able to get any amount of service he pleases at any time. Taking
these requisites into consideration it is evident that there is no
substance which combines them so well as a Metal. Metal is
uniform in its texture : it can be divided into any number of
fragments, each of which shall be equal in value to any other
fragment of the same weight : and, if required, these fragments
can always be re-united and form a whole again of the value of all
its parts : which can be said of no other substance
All civilized nations, therefore, have adopted a Metal as
Money : and of Metals, Gold, Silver, and Copper, have been
chiefly preferred
The Chinese invented Paper Money
36. We have now to treat of a material used as Money,
which, in latter times at least, has had incomparably more
influence in the world than all the gold and silver : namely
Paper
The Romans invented the business which, in modern language,
is termed Banking. The Roman bankers invented Cheques and
Bills of Exchange, but they did not invent Bank Notes. The use
of Cheques and Bills of Exchange by the Romans was extremely
narrow, restricted to the immediate parties : and they never, as
far as we are aware, got into general circulation so as to serve the
purposes of Money
THE CHINESE INVENTED PAPER MONEY 77
The invention of Paper to be used as circulating Money is due
to the Chinese
Tn the beginning of the reign of Hiantsong, of the Dynasty
of Thang, about the year 807 a.d. there was great scarcity in the
country. The Emperor ordered all the merchants and rich persons
to bring all their money into the public treasury, and, in exchange
for it, gave them Notes, called fey-thsian, or flying money. In
three years, however, this money was suppressed in the capital,
and was only cni*rent in the provinces. In 960 A D., Thai-tsu,
the founder of the Soung Dynasty, revived this practice.
Merchants were allowed to deposit their cash in the public
treasuries, and received in return Notes, called pian-ihsian, or
current money. The convenience of this was so great that the
custom quickly spread, and in 997 there was paper in circulation
to the amount of 1,700,000 ounces of silver, and in 1021 it had
increased to 2,880,000 ounces. At this period a company of
sixteen of the richest merchants were permitted to issue Notes
payable in three years. But at the end of that term the company
was bankrupt, which gave rise to much public distress and
litigation. The Emperor abolished the Notes of this company
and forbade any more joint stock banks to be formed. Henceforth
the power of issuing Notes was kept in the hands of the Govern-
ment. These notes were also called ktao-tsUj and were of the value
of an ounce of silver. In 1032 there were ktao-tsu to the value
of 1,256,340 ounces in circulation. Subsequently banks of this
nature were set up in each province, and the Notes issued by one
provincial bank had no currency in any other. These were the
first bank notes on record — that is to say, notes issued in exchange
for money, or convertible into money : and not paper money, or
paper created without any previous deposit of specie. Besides
these bank notes, the Chinese manufactured Paper Money to a
"vast extent^
It would be too long here to give a complete history of the
Paper Currency of China : but we have given some full notices
of it elsewhere.^ But it may interest our readers to know the
process of its manufacture
* Klaproth, Journal Atiatiqxte, Vol. I., p. 266
' Dietionary of Political Economy ^ Art. Currency, p, 666.
78 THEORY OF CREDIT
About 1288 Marco Polo traveled in China, and discovered the
existence of this Paper Money. In Book II., c. 18, he gives an
account of its manufacture. He says that it was made in Kanbaln.
The inner rind of the mulberry tree was steeped and pounded in
a mortar, and then made into paper, resembling that made from
cotton, but qaite black. It was then cut into pieces nearly square,
but of different sizes. The smallest were of the value of a
denier tournois : the next for a Venetian groat : others for two,
five, or ten groats : others one to ten gold besants. Several
ofiicers had to subscribe their names, and place their seals on each
note, which were then stamped with the royal seal dipped in
Vermillion. Counterfeiting was a capital offence. It had then a
forced currency, and no one dared to refuse it on pain of death.
Caravans of merchants arrived with their goods, which they laid
before the king : who selected what he pleased, and paid them in
this money. \^hen any one wished to exchange old money for
new, it was done at the Mint, at a charge of three per cent. If
any one wanted gold or silver for manufacture, they could
obtain bullion at the Mint in exchange for the paper. Marco
Polo mentions many cities where he observed this money in
circulation
In the next century Sir John Mandeville traveled in China,
and speaks of this paper money * — ** This Emperour may dispenden
als moche as he wile, with oiiten estymaoioun. For he despendethe
not, he makethe no Money, but of Lether emprented, or of
Papyre. And of that Moneye, is som of gretter Prys, and som
of lasse prys, aftre the dyversitie of his Statutes. And whan
that Money bathe runne so longe, that it begynnethe to waste,
than men beren it to the Emperoure's Tresorye : and than thei
taken newe Money for the olde. And that Money gothe thorghe
out alle his Provynces. For there and bezonde them, thei make
no Money nouther of Gold nor of Sylver. And therfore he may
despende y now, and outrageously "
Credit and Paper, either payable in specie or inconvertible,
now forms the great circulating medium or currency of the world,
and, as we shall show hereafter, amounts to at least fifty times the
quantity of specie in this country
» The Voiage and Travaile, p. 239. Edit. 1839
CREDITS PAYABLE IN SERVICES 79
Credits payable in Services
37. In every Obligation or Conti*act the party who has the
Right to enforce the performance of the Duty is the Creditor,
and the party whose duty it is to perform it is the Debtor
The words of the Digest are general. A Credit is the Right to
compel a person to Pay or Do something. Hence large amounts
of Credit are payable, not in any material substance, Money or
any other : but in Personal Services
Thus, in feudal times Rents were payable not only in Money,
or in products of the earth, termed Rents in kind : but also in
Personal Services : and such Rents were termed Rent Services.
And the person who has the Right to demand a service is as much
a Creditor as the person who has the right to demand the payment
of a material substance : and the person who is bound to render a
service is as much a Debtor as the person who is bound to pay
some material substance
A jaded legislator has taken shootings in the Highlands. On
the 10th of August he goes to the office of the railway and pays
^Ye guineas for a ticket to Inverness. That ticket is a Credit :
it is a Bill of Exchange payable in a railway journey to Inverness
Or, a person wishes to see Irving in Hamlet. He has, perhaps,
to buy a ticket for a box a fortnight in advance. That ticket is a
Credit or Right of action,or a Bill payable in seeing Irving in Hamlet
A College engages one of its membei*8 at a quarterly salary to
give lectures to its students. The lecturer gives his lectures, and
thus acquires a right to demand his salary from the College. This
Kight of Action is the Credit or Debt
A member of the University gives lessons to private students.
The fee is paid either in advance or after the lessons given. If
the fees are paid in advance, the student acquires a Right of action,
a Credit or a Debt, against his tutor to demand so much instruction.
If the lessons are given first, the tutor acquires a Right of action,
a Credit or a Debt, to demand payment for his lessons
The master of a household engages servants and agrees to pay
them wages monthly, or quarterly, as the case may be. When
the servants have performed these terms of service, they have a
Right of action against their master for their wages. The Right
of action is a Credit or Debt
1
80 THEORY OF CREDIT
So there are iDnimierable other caaes where persons oonfcract
to perform professioiial serricea. These contracts to perform
services are aa mnch Obligationa aa Contracta to pay material
aobstancea
Hence Credit can pnrchase services exactly in the same way
as Honey : is is a Purchasing Power which can effect any result
that Honey can
The Function of Credit u to bring into Commerce the Present
Yaluaa of Future Profita
38. The true function of Credit is now apparent
It is a very common idea that Credit is the goods which are
*Ment'': or the transfer of them
^ > ~Such ideas are utterly erroneous. We have shown that a
'^Credit is the Present Right to a Future Payment
And the true function of Credit is to biing hito commerce the
Present Values of Future Profita
When an estate in land is sold the Present Value of all its
Future Profits is expressed and brought into circulation, or
commerce, by the Honey paid for it
The total amonnt of the Shares in any commercial company,
banking, railway, insurance, canal, or any other, denotes the value
of the existing property of the company, together with the total
Present Value of their Future Profita
The money paid for the Goodwill of a business, a copyright,
a patent, a professional practice, &c., is the Present Value of
their Future Profits
So, when a merchant or trader trades on '^ Credit " he
brings into commerce the Present Value of a Future Profit.
He buys the goods or the labor, and gives as their Price the
right to demand a sum to be paid out of the expected
profits
So when the State contracts a loan, it buys the money, and
gives as its price, the Right to demand a sum of money out of the
future income of the people
1
FUNDAMENTAL CONCEPT OF MONEY 81
So when municipal corporations and other public bodies
contract loans, they buy money, by giving as its price the Right
to demand payments out of the future revenues of their
constituents
So Credit in all its forms, and to whatever purpose it is applied,
simply brings into commerce the Present Value of a Future
Payment
The Fundamental Concept of Monetary Science
39. The preceding considerations now enable us to perceive
the Fundamental Concept of Monetary Science
We have seen that writers of all classes are agreed as to
the fundamental nature of Money. It represents Debts which
are due to persons who have done services to others, and have
received no equivalent services in return. It merely represents
the Right to demand these equivalent services when they please :
and its special function is to measure, record, and preserve
these Rights for future use : and to transfer these claims to
any one else
If all the services exchanged in society exactly balanced, there
would be no need for Money
Supposing, then, that there was nothing but Metallic Money
in use, the following axiom is evident —
*' The Quantity of Money in any Country represents the
Quantity of Debt that there ivould he, if there were no Money "
But, as we have seen, that in civilised countries these Debts,
or Rights, are recorded in the simple form of Rights against
particular persons, as well as in Metallic Coin, which are Rights
against the general community, the term Currency, includes these
Debts or Rights in both forms
Hence, it is clear that the Currency represents nothing but
! Transferable Debt: and that whatever represents Transferable
Debt is Currency, whatever its nature or form may be, either
Metal, or Paper, or anything else
Consequently, this proposition necessarily follows —
** Wfiere there is no Debt there can be no Currency "
82 TIIKORY OF CREDTT
All erroneous theories of Currency have been founded on nofc
perceiviug the fundamental nature of Currency : and the greatest
monetary disasters the world has ever seen have been produced by
violating this fundamental axiom
On the Distinction between Honey and Credit
40. It has now been shown that Money and Credit are
essentially of the same nature : Money being only the highest
and most general form of Credit. They are each a Right or
Title to demand something to be paid or done by some one else
No one can compel any one else to sell him anything for Money
or Credit. When, therefore, any person has voluntarily taken
Money in exchange for anything it is in reality only Credit : because
he only takes it in the belief that he can exchange it away again
But suppose that a sale has taken place, and that a Debt has
been incurred thereby : public policy requires that the Debtor
should be able to compel the Creditor to accept something in
discharge of his Debt. It would cause infinite misery if Creditors
could arbitrarily refuse the oflFer of- payment of their Debts.
Hence in all countries the Law declares that if a Debt has been
incurred, the Debtor can compel the Creditor to accept some
specific thing in payment of it
Whatever that Something is which a Debtor can compel a
Creditor to accept in payment of a Debt, is termed Money or
Legal Tender
From this it follows that some things may be Money in some
cases, and not in others
Gold Coin is Money, or Legal Tender, in all cases and to any
amount
Silver is only Money to the amount of 40s. If a creditor
chooses to accept it in payment to a larger amount than 40s., it
is entirely of his own free will
In England, as between the public and the Bank of England,
Bank Notes are nothing but Credit. The Bank cannot compel
any one to receive its Notes ; and any holder of its Notes can
compel the Bank to cash them on demand
WHY PAPER CAN SUPERSEDE MONEY 83
Between private persons a Bank Note for £5 is not Legal
Tender, or Money, for that exact amount of Debt. But in all
Debts above £5, Bank Notes are Money or Legal Tender. But
even this is only so long as the Bank pays its Notes in cash on
Demand. If the Bank were to stop payment, its notes would
cease to be Tjegal Tender in any case
In Scotland and Ireland Bank of England Notes are not
Legal Tender in any case
If two persons are mutually indebted in equal amounts and
payable at the same time, each may compel the other to accept
the Debt he owes in payment of the Debt which is due to him.
Each Debt is therefore Money, or Legal Tender, in respect of
the other
This is a principle of supreme importance in modern commerce,
as will be shown more fully hereafter
•
Reason ivhxj Paper can snpei'sede Money
41. The reason why Paper can supersede Money is now
apparent
An order to receive a coat could never serve as a substitute
for a coat : because it cannot serve the same purpose as a coat.
An order to receive bread or wine cannot supersede bread or
wine, because it cannot serve the same purpose as bread or wine :
and so on, regarding orders for other material chattels. An order
for such things can never serve as a substitute for the things
themselves, because they are heterogeneous quantities ; and cannot
serve the same purpose as the things themselves
But an order to pay money can serve as a substitute for money,
because they are homogeneous quantities. A piece of Money is
of no more direct use for eating, drinking, or clothing, than a
piece of paper
Consequently the exchange of Paper for Money is nothing
more than the exchange of a particular Eight for a general Right
As Daniel Webster, the eminent American jurist, said — "Credit
is to Money what money is to goods." That is. Credit is an
order for Money, and Money is an order for goods
g2
84 THEORY OF CREDIT
To be useful Money must be exchauged away, just as Paper is.
Hence, if paper can be exchanged for exactly the same things that
Gold can, Paper has the same Value as Gold. As the Italians say —
•*Che oro vale,oro e." " That which is of the Value of Gold, is Gold"
The same Quantity may require to be regarded in different aspects
in different Sciences
42. It is very epseutial to observe that the same Quantities
may be common to two sciences, and may require to be regarded
in different aspects in each
Thus Jurisprudence and Economics are inseparably allied:
and Money and Bank Notes, Bills of Exchange and Abstract
Rights are both Juridical and Economical Quantities : but they
ditfer in some respects according as they are regarded in a
Juridical and in an Economical aspect
Thus in Jurisprudence, Money is the absolute payment and
satisfaction for a Debt ; and a closing of the transaction : and
Bills of Exchange are not the closing of the transaction, unless
they are accepted as such
Also in Jurisprudence Money is Corporeal Property : abstract
Rights and Rights of action are Incorporeal Property : but if
these Rights and Rights of action are recorded on a Material
such as Paper, Parchment, or any other, they become Corporeal
or Material Property
But in Economics a payment in Money is not the closing of
the transaction. A complete exchange is the obtaining a satisfac-
tion for a satisfaction. In Economics Money is only an abstract
Bight, preserved and recorded in gold to obtain a satisfaction.
Money is, therefore, in Economics, a Bill of Exchange in Gold.
So, in Economics, Rights, whether purely abstract or recorded on
paper, are absolutely the same. A piece of Money is no more
an Economic satisfaction than a piece of paper
Hence, in Economics, Money and Rights of action, whether
abstract, or recorded on paper, are all of the same nature. They
are all simply Rights to demand something in future : hence in
Economics they are all equally Incorporeal Property or Credit
MONEY AND COMMODITIES 85
But as they all equally possess the quality of Exchangeability
they are all Wealth
Theie is no Necessary Relation between the Quantity of Honey
in any Country and the Quantity of Commodities, or their Price
43. We have now to demonstrate a proposition of the
greatest importance in Economics, and on which errors of the
most serious nature are very prevalent
Many writers on Economics have supposed that the quantity
of Money in a country bears some necessary relation to the
quantity of commodities in it : and many more think that the
prices of commodities are determined by the ratio which the
quantity of metallic money bears to the quantity of commodities.
That this is a very grievous error may very easily be shown
Suppose that A and B are mutually indebted : that A owes
B £10 : and B owes A £13. Then it is quite clear that their
debts may be settled in three different ways —
1. Each may send a clerk to demand payment of his debt in
money : this method would require £23 to discharge the two
debts
2. A may send £10 to B to discharge his debt : and B may
send back to A the same £10, with £3 additional, to discharge
his debt : this method would require £13 to discharge the two
debts
3. They may meet and set off their mutual debts, and pay
only the difference in coin : by this means the two debts would
be discharged by the use only of £3
Now it is quite clear that a very diflFerent quantity of money
would be required to carry on any given amount of business,
according as either of these methods of settling debts was
adopted. Between the first and the third methods there is a
difference of £20 : but there would be no difference in the price
of commodities. These twenty pounds would not influence
prices, but would only be required to settle debts in a clumsy
way. So that it is clear that by a simple change in the method
of doing business, £20 may be withdrawn from its employment,
und applied to new transactions
8fi THEORY OF CREDIT
From these considerations it appears that there may be lai'ge
quantities of money in a country which may exercise no influence
on prices : and the ratio between money and commodities may
vary greatly, according as one or other of these methods of doing
business is adopted
Now if a country which habitually used the first method were
to change its custom, and adopt the third method, it is very clear
that a very large quantity of money might be disengaged from
its usual employment, and applied to promote new operations :
and therefore for all practical purposes it would be an addition to
the previously existing quantity of money
Hence the various methods of economising the use of money
are to be considered as an increase of the resources of the nation.
It is one of the great functions of a bank to promote such a
change in the method of doing business, and to bring people
together to balance their mutual debts without the intervention
of money. And it will be shown in subsequent chapters how
immensely the skilful development of the method of modern
banking economises and developes the national resources
On Barter : Sale or Circulation : and Exchange
On Barter
44. When material products are exchanged directly for
products the transaction is termed Barter
On Sale or Circulation
The Economists only admitted an Exchange to be where a
product was exchanged for a product, i.e., a Barter : that is
where each side obtained a Satisfaction
But, in modern times, such exchanges are comparatively rare.
Persons usually want to obtain things from others, while those
others want nothing from them. To obviate the inconvenience
that would arise if no one could get what he wanted, unless he
could supply the other party at the same time with what he
wanted, people hit upon the plan of adopting some particular
commodity which should be universally exchangeable. The buyer,
SALE OR CIRCULATION 87
therefore, gave the seller in exchange fur his product an equivalent
of this universally exchangeable merchandise, so that he could
get any satisfaction he pleased from any one else who could
render it
This univeraally exchangeable merchandise is termed Honey:
and the exchange of a product for Money is termed a Bale. The
person who has got the Money has not got a Satisfaction : his
desire is not consummated, or completed. In order to obtain
a Satisfaction, he must exchange away the Money for some
product he does desire. Hence the Economists termed a Sale a
Bemi-excliange
Le Trosne says* — " There is this difference between an Exchange
and a Sale, that, in an Exchange everything is consummated, or
completed (co?isomme) for each party. They possess the thing
which they desired to procure, and they have only to enjoy it.
In the Sale on the contrary, it is only the purchaser who has
attained his object, because it is only he who is in a position to
enjoy. But everything is not ended for the seller "
And again — " Exchange arrives directly at its object, which
is completion {consommation) : it has only two terms, and is
ended in one contract. But a contract in which Money intervenes
is not completed {consomme) : but it is necessary that the seller
should become a buyer, either himself or by the interposition of
the person to whom he transfers the Money. There are, therefore,
in order to arrive at completion {coyismnmation) which is the
ultimate object, at least four terms and three contractants, of
whom one intervenes twice "
When, however, the person who had sold his product for
Money, and, therefore, furnished a satisfaction to the other party
had himself exchanged away the Money and obtained a product
for it, he, too, had acquired a Satisfaction which he could enjoy,
and the Exchange was completed {consomme)
For this reason Honey was called the Medium of Exchange
This Sale the Economists called Circulation. Sale, or Circula-
tion, therefore, the Economists defined to mean the Exchange of
a Product for Money
» Dt VlntirU Socide, p. 905, 916
88 THEORY OF CREDIT
Bat Credit is used in all respects in the same way as Money
to purchase, or Circulate, commodities. Hence, Sale or Circulation
always denotes an exchange in which one or both of the Quantities
exchanged is Money or Credit
The sum total of these Sales is properly termed the Circnlation.
Hence any sum of Money may add considerably to the Circulation :
because every time it is transferred it is a Sale, and, therefore, it
augments the Circulation
As the use of Money and Credit is to set industry in motion :
and inasmuch as they have no use unless they do that : their
beneficial eflFects are not to be measured by their actual amount,
but by the industry which they generate. Money lying locked
up in a box, or Credit unused, only represents latent power, and
not actual power. They may be called Power or Wealth in
the latent state : they resemble the steam engine of a mill
which is not going : and which is of no use until it is set in
motion
And as the produce of the mill is measured by the Quantity
of the Motion of the engine : so the useful effect of Money and
Credit is measured by their Quantity of Motion ; which is called
the Circulation. The Circulation, which is the sole test of their
useful effect, is, therefore, the product of their amount multiplied
into the velocity of their Circulation. The Quantity of Motion of
the engine is called its Duty: hence the Circulation of Money
and Credit may be termed its Duty
It is so essential to have a clear conception of the useful eflPecfc
produced by any amount of Money and Credit, that we may add
another illustration. The effect produced by any body in
motion is measured by its weight or mass multiplied into its
velocity : which is termed its Momentum. If the mass be
diminished, yet by increasing the velocity, the effect or Momentum
may still be the same. If a body weighing 100 lbs. move with a
velocity 1, its momentum will be 100 : but if we diminish the
weight to 50 lbs., and can double its velocity, the effect, or
Momentum, will still be the same
EXCHANGE 89
The eifecfcs of Money, or Credit, are exactly analogoas.
Their useful effect is the result of their combined amount and
velocity of Circulation : which is termed the Circulation. If
we can make £50 circulate with twice the velocity of £100,
the useful effect, or Circulation, will be the same. Hence, it
may be said that the Circulation is the Momentum of Money
and Credit ^'^ —
I t-
l \ ^ A y >
On Exchange V p^ ' ^- V*' v / -* \
An Exchange is the interchange of things of a like nar
either products for products : or Money or Credit for Money or
Credit
Thus we speak of the Foreign Exchanges, or the value of the
money of one country in terms of the money of another. Or we
ask for the change (i.e., the 'change or exchange) of a £5 note
or a sovereign : a Bill of Exchange is a Eight of action to be
exchanged at the proper time for Money : so we exchange one
"book for another : or a picture for a statue
So in Lear, when Albany throws down bis glove to the
traitor Edmund, the latter, throwing down his own, says —
** There's my exchange": and a little further on Edgar says to
Edmund — " Let's exchange charity "
So in Hamlet^ Laertes says — ^^ Exchange forgiveness with me,
noble Hamlet "
When the interchange is between products and Money
or Credit, the one who gives the Money, or Credit, is said
to Buy the product : and the one who gives the product is
8aid to Sell it
When the exchange is between Money or Credit for Money or
Credit, each side is said to Buy and to Sell : and each quantity
of Money or Credit exchanged for the other is termed the price of
the other
Thus we buy a horse or a house or land, or cattle, or a Bill of
Exchange with Money or Credit. An officer formerly bought a
commission in the army : but he exchanged from one regiment
into another
90 THEORY OF CREDIT
On the Meaning ^Circulating Medium
46, We have now to consider two terms, Circulating
Medium and Currency, which are both of comparatively modern
origin, which have in recent times given rise to many
controversies, but which are admitted to be synonymous, and
consequently if we can positively determine the meaning of one of
them, that will also necessarily determine the meaning of the other
The term Circulating Medium seems to have come into use in
the last decade of the last century. It does not occur in Adam
Smith. The first occasion on which we have met it is in the
debate on the Bank Restriction Act of 1797, in which Fox said,^
'^ He wished that gentlemen, instead of amusing themselves with
new terms of * Circulating Medium ' and the like," &c., which
shows that it must then have been of very recent origin
Pitt, in his reply, said,*^ "As so much had been said on the
nature of a Circulating Medium, he thought it necessary to
notice that he did not for his own part take it to be of that
empirical kind which had been generally described. It appeared
to him to consist in anything that answered the great purposes of
trade and commerce, whether in specie, paper, or any other term
which might be used." It is quite evident, therefore, that Pitt
included under the term Circulating Medium, Money and Credit
in all its forms
The verb to Circulate, like many others in English, has both
an active and a neuter meaning
1. It means that which Circulates commodities; Le,, which
causes products to circulate : where it is an active verb
2. That which Circulates itself : where it is a neuter verb
Smith uses the word Circulate in both senses in different
places. Thus, speaking of Gold and Silver, he says, " Their use
consists in Circulating commodities "
** The great wheel of Circulation is altogether different from
the goods circulated by it. The revenue of the society consists
altogether in these goods, and not in the wheel that Circulates
them " ; where Circulates is active
* Farliamentai-y History of England^ Vol. xxxni., p. 340
a Ibid., 342
MEANING OF CURRENCY 91
A little further on lie speaks of the different sorts of paper
money : but be says that the Circulating notes of banks and
bankers are best known ; where Circulates is neuter
In the following sentence both senses occur : *^ Let us suppose
for example that the whole Circulating money of some particular
country amounted at a particular time to one million sterling,
that sum being then sufficient for Circulating the whole annual
products of their land and labor "
The ordinary meaning of words in scientific language leaves
no possible doubt as to which is the true meaning of Circulate
in the expression Circulating Medium. A medium, in sj^ientific
language, means some middle thing by which something else is
effected. Thus Money is termed the Medium of Exchange,
because exchanges are effected by it. Hence the Circulating
Medium is the medium by which the Circulation of commodities
is effected
Now it has just been shown that the Economists defined
Circulation to mean Sales. And how are sales effected ? By
the means or medium of Money and Credit. Buying with
Money effects the Circulation of products: but buying with
Credit equally effects the Circulation of products, in whatever
form the Credit may be, either written or unwritten
Hence the total amount of the Circulating Medium must
necessarily mean the total amount of Money and Credit in all its
forms
On tha Meaning of Currency
46. The meaning of the word Currency, which all writers
admit to be synonymous with Circulating Medium, has given rise
to protmcted controversies in modem times, which however we
shall not notice at present. We shall in this section explain the
true meaning of the word
The word Currency is in fact a technical term in Mercantile
and Constitutional Law : and the following is the true meaning of
"Current" and "Currency" in English Law
It is a general rule of law that a person cannot transmit to
another any better title to a thing than he has himself
92 THEORY OF CREDIT
It is also a general rule of law that if a person loses a thing
or has it stolen from him, he does not lose the Property in it.
Consequently he can not only recover it from the thief or finder,
but also from any one else in whose possession he may find it, even
though that person may have bought it or taken it in pledge, and
given full value for it, and not knowing that it was not the lawful
property of the seller or pledger. This Eight of recovery is called
the jti8 vindicandi in Koman law
But to this rule of law Money was always, from the necessity
of the case, an exception. If the true owner of the money finds it
in the possession of the thief or finder, he can reclaim it. But if
the thief or finder has once purchased goods in a shop with it,
and the shopkeeper takes ic honestly in the way of business, and
without knowing that it has been stolen : he can retain it against
the true owner, even though he should be able to identify it. That
is, the person who acquires Money honestly in business has a good
title to it, even though the transferor had not. Thus it is said
in Law that the Propei'ty in Money passes by Delivery, Thus after
the Money has once been passed away in commerce to an innocent
receiver, the true owner has lost hx^jus vindicandi
It is this peculiarity which affects the Property in money
which passes by delivery, which is denoted by the words " Current "
and " Currency " in English Law. And, when an Act of
Parliament declares that any instrument shall be " Current," it
means that the Property in it shall pass by delivery to the innocent
purchaser
This attribute of Currency is also termed Negotiability
And when the representatives of Money, such as Bank Notes,
Cheques, Bills of Exchange &c., came into use, the Law Merchant
applied the same principle of Currency to them. They are
like money in so far as this, that the Property in them passes like
the Property in Money. Thus, if they are lost or stolen, the true
owner may recover them if he can find them in the hands of the
thief or finder ; but, if the finder or thief manages to pass them
away for value, in the ordinary course of business, to an innocent
purchaser, that innocent purchaser acquires the Property in them :
and may retain them against the true owner, and enforce payment
of them from all the parties liable
MEANING OF CURRENCY 93
This doctrine has been affirmed in a whole series of cases in
the Courts of Law which we shall notice shortly
It follows from this that in strict law, this principle of
Currency can only be applied to those Eights of action which
are recorded on some material. An abstract Right cannot be
lost, mislaid, or stolen : or passed away in commerce. For a
Right to be Currency in strict law it must be recorded on some
material, so as to be capable of being carried in the hand : or in
the pocket : or put away in a drawer : or dropped in the street :
or stolen from the drawer or the pocket : and carried off by the
finder or thief : and transferred in commerce
So far, then, as regards Mercantile Law there is no difficulty.
The meaning of the word is perfectly clear. But if the word
Currency is used to denote a certain class of Economic Quantities,
synonymous with Circulating Medium, a difficulty arises ; because
there is an immense mass of Credit which has produced exchanges,
and has circulated commodities, and is, therefore, Circulating
Medium, which is not recorded on any material at all, in such a
way that it can be lost or stolen, and carried off and transferred
in commerce by manual delivery
/ Thus, the gigantic mass of Banking Credits, and the Book
' Debts of Traders, have all eflPected a Sale or Circulation : and,
.therefore, they are all Circulating Medium : but they have not
the attribute of Currency in a legal sense : because they cannot
i be mislaid : lost : or stolen : and ];ucked up and passed away in
commerce by manual delivery. So also private debts between
j persons termed Verbal Credits : they only arise out of the
' transfer of goods or money : and they exist equally whether they
are recorded on paper or not. They are equally Circulating
Medium. Private debts among traders affect prices exactly like
so much Money. Consequently, though they are not Currency in
strict law, yet if that word is still to be retained in a scientific
sense as denoting a certain class of Economic Quantities,
synonymous with Circulating Medium, they must all be included
under that term : because they can all be recorded on paper at
pleasure : and their nature and effects are exactly the same
whether they are recorded on paper, or not
94 THEORY OF CREDIT
In the great discussions in Parliament which arose out of the
suspension of cash payments by the Bank of England, no attempt
was made to define the term Currency. But all the speakers
assumed that it comprehended Money and Credit in all its
forms
This truth was Well expressed by Lord Titchfield in the House
of Commons. Speaking of the various forms of Credit used as
substitutes for Money he said—" When it was considered to how
great an extent these contrivances had been practised in the
various modes of Verbal, Book, and Circulating Credits, it was
easy to see that the country had received a great addition to its
Currency. This addition to the Currency would have the same
effect as if gold had been increased from the mines ''
Decisions of the Courts of Law regarding the meaning of
Currency
47. The meaning of the word Currency has acquired so much
practical importance in consequence of the Bank Charter Act of
1844 being based upon a peculiar definition of it, which will have
to be examined hereafter, that it will be more satisfactory to our
readers to place before them a resume of the decisions of the Courts
of Law as to the meaning of the term
Bank Notes. In Miller v. Race (1 Burr., 452), confirming
Anonymous (1 Lord Raymond, 738), the Court of Queen's Bench
decided that Bank Notes have the Credit and Currency of Money
to all intents and purposes. ** An action would lie against the
finder : that no one disputes : but not after the Note had been
paid away in Currency. An action would not lie against the
defendant, because he took it in the course of Currency : and,
therefore, it could not be followed into his hands. It never shall
be followed into the hands of a person who bona fide took it in the
course of Currency. A bank note is constantly and universally,
both at home and abroad, treated as Money, as cash : and it is
necessary, for the purposes of commerce, that their currency should
be established and maintained "
DECISIONS AS TO CURRENCY 95
Cheques. In Grant v. Vaiighan (3 Burr., 1516), the Court
unanimously held that Cheques possess the attribute of Currency,
exactly like Bank Notes
Bills of Exchange. In Peacock v. Rhodes (2 Douglas, G33),
the Court decided that Bills of Exchange possess the attribute of
Currency, exactly the same as Bank Notes. Lord Mansfield said :
" The holder of a Bill of Exchange or Promissory Note is not to
be considered in the light of an assignee of the payee. An
assignee must take the thing assigned, subject to all the equity to
which the original party was subject. If this rule applied to Bills
and Promissory Notes it would stop their Currency. The law is
settled, that a holder, coming fairly by a note or bill, has nothing
to do with the transaction between the original parties. I see no
difference between a note indorsed blank, and one payable to
bearer. They both go by delivery, and possession proves property
in both cases "
In Collins v. Martin (B. & P., 648), the same doctrine of
Currency was applied to pledging bills equally as to selling them.
Eyre, C. J., said, "For the purpose of rendering Bills of Exchange
negotiable, the Eight of Property in them passes with the bills.
Every holder with the bills takes the Property, and his title is
stamped upon the bills themselves. The Property and the
possession are inseparable. This was necessary to make them
negotiable : in this respect they differ essentially from goods, of
which the property and the possession are in different persons "
roreign Bonds. In Oorgier v. Mieville (3 B. & C), Foreign
Bonds, payable to the holder, were decided to possess the attribute
of Currency, exactly as Bank Notes and Bills indoreed in blank
Exchequer Bills. In Wookey v. Pole (4 B & Aid. 1), Exche-
quer Bills payable to blank or order were also decided to possess
the attribute of Currency. The question was whether Exchequer
Bills followed the law of goods in which there is the Jus
vindicandi : or the law of money, in which there is no Jus
vindicandi. The Court decided that Exchequer Bills follow the
Law of Money. Holroyd, J., said — " It has long been fully
settled that Bank Notes or Bills, drafts on bankers, bills of
exchange, or promissory notes, either payable to order and
indorsed in blank, or payable to bearer, when taken bond fide^
96 THEORr OF CREDIT
and for a valaable consideration pass by delivery, and vest a
right thereto in the transferee, without regard to the title, or
want of title, in the person transferring them
These authorities show that not only money itself may pass, and
the right to it may arise by Currency alone ; but further, that
these mercantile instruments, which entitle the bearer of them to
money, may also pass, and the right to them anse in the like
manner, by Currency or Delivery We next
consider the nature and effect of the instrument, both as to the
property which it concerns, and as to its Negotiability, or
Currency, by law The instrument is created by
the Statute 48, Qeo. III., c. 1, and is hereby made Negotiable
and Current The case therefore stands thus :
this Exchequer Bill was a Current and Negotiable instrument for
the payment of money. Now money passes from one person to
another by reason of its Currency^ and for that reason only, and
not because it has no earmark, it cannot be recovered from the
person to whom it has been passed. The exchequer bill, there-
fore, seems to me, upon the same principle, to follow the nature of
the money for which it is a security "
In Ingham v. Primrose (7 C.B.N.S., p. 8), Williams, J.,
says — •' It is, we think, settled law, that if the defendant had
drawn a cheque, and if, before he had issued it, he had lost it, or
it had been stolen from him, and it had afterwards found its way
into the hands of a holder for value without notice, who had
sued the defendant upon it, he would have had no answer to the
action. So if he had indorsed a bill in blank, or a bill payable
to his order, and if it had been lost or stolen before he had
delivered it to any one as indorsee. The reason is that such
Negotiable Instruments have by the law merchant become part of
the Mercantile Currency of the country : and in order that this
may not be impeded, it is requisite that innocent holders for
value should have a right to enforce payment of them against
those who, by making them, have caused them to be part of such
Currency "
In Whistler Y. For ster {14: C.B.N.S., 248) Willes, J., said—
** The general rule of law is undoubted, that no one can transfer
a better title than he himself possesses : Nemo dat quod non haheU
FORMS OF CURRENCY 97
To this there are some exceptions : one of which arises out of the
rule of the law merchant as to Negotiable Instruments. These
being part of the Currency, are subject to the same rule as
money "
In Shute v. Robins (1 M. & M., 133), Lord Tenterden spoke of
banker's paper as being part of the Circulating Medium of the
country
In Lavg v. Smyth (7 Bing., 284), Tindall, C. J., said : **The
first question was, whether the instruments in dispute had acquired
from the course of dealing pureued in the City the character of
Bank Notes, Bills of Exchange, Dividend Warrants, &c.. Cheques,
Bills, or otlier Instruments which form part of the Currency of
the country
In Goodwin v. Roharfs (4 R., 10 Excheq., 877), Scrip entitling
the bearer to demand bonds from a foreign Government were also
decided to possess the attribute of Currency
These extracts authoritatively decide the true meaning of the
word Currency. It means that the property to which the attribute
is attached is an exception to the general jus vindicandij which
attaches to goods
*. It means that when once this class of property has been
Ucquired honestly in busiuess by a purchaser, the property in it
passes by delivery. And this is the sole meaning of the word
ICurrency
These cases also decide that money, and all wiitten securities
for money, made transferable by the parties to them, are all
included under the term Currency
The different Torms of Currency
48. Adopting, then, the terms Currency and Circulating
Medium as absolutely identical and synonymous, and designating
a certain class of Economic Quantities, its different forms are : —
1 . Coined Money : Gold, Silver and Copper
2. The Paper Currency: Bank Notes, Cheques, Bills of
Exchange, Exchequer Bills, &c.
H
98 THEORY OF CREDIT
8. Simple Debts of all sorts : not recorded as Circulating
Paper: sach as Credits in Bankers' books termed Deposits: Book
'Debts of traders : and private Debts between persons : because all
.these Debts may be recorded on paper at the will of the parties ;
'which in no way alters their nature. All these denote that a
'transaction has taken place : and are Titles to futare payment.
From these considerations it follows that the Currency, or Circu-
lating Medium, of any country is the sum total of all the Debts
due to every individual in it : that is all the Money and Credit
in it
Postage stamps must also be included under the term Currency.
They are a most usual form of remittance : they pass in small
payments : and since the Post Office is bonnd to cash them, they
are in fact penny Notes. Though the point has not been decided
at law, there can be no doubt that if any one were to steal postage
stamps, if they were taken honestly in payment, it would be held
that they possess the attribute of Currency: hence they are
strictly Currency
On the Channel of Circulation
49. The quantity of the Circulation, or the amount of
Money and Credit, representing the Indebtedness, or the balances
which arise from the unequal exchanges of products and services,
is frequently termed by Adam Smith and other writers the Channel
of Circulation
This Channel of Circulation is filled with some Material : and
Prices are estimated by the quantity of this material, which is given
in exchange for any Economic Quantities
Let us suppose that Gold alone was used at any time to
represent Debt, and fill the. Channel of Circulation. This Gold
metal is divided into certain pieces of fixed weight and quality,
termed coins ; and prices are estimated in these Coins
But suppose that at any time, Gold was discontinued, and
Silver substituted as the representative of Debt : and suppose that
Coins were struck of Silver of exactly the same weight as the Gold
on^s
THE CHANNEL OF CIRCULATION 99
Then as Silver is at present about eighteen times less ralaable
as Gold, it would require eighteen times as many silver coins to
represent any amount of Debt, as it would Gold coins. And prices
would rise eighteen fold : but other products would still preserve
the same relations among themselves. Hence, though prices would
rise, yet the values of products with respect to each other would
remain exactly the same
Again, suppose that Silver was taken away as the rerpresentative
of Debt, and Copper substituted : and Copper coins struck of the
same weight as the previous Gold and Silver ones, and called by
the same name. Then prices would be estimated in Copper coins :
and as Copper is about 900 times less valuable than Gold, prices
estimated in Copper would rise to about 900 times their amount in
Gold. But the relative values of all other quantities would
remain the same
Now, as the value of Gold as representing Debt, depends upon
the quantity of Gold which represents any amount of Debt, it
would manifestly follow that if the quantity of Gold which
represented any amount of Debt were greatly increased, the value
of Gold would greatly diminish. If Gold became as plentiful as
Silver, Gold would have no more value than Silver. Consequently,
even while the weight and the quality of the coins remained the
same. Gold would fall to the eighteenth part of its former value
as a Purchasing power
So, if Gold became as plentiful as Copper, it would be of no
more purchasing power than Copper : that is, it would fall to
about the 900th part of its former value
Thus, in a general way if any quantity of Stuff of any sort is
used to represent any quantity of Debt at any time : and if the
quantity of Stuff is greatly increased, while the quantity of Debt
remains the same, it necessarily produces a great diminution in the
value of the StuflF, and a general rise of Prices
But the quantity of Stuff which represents Debt and fills the
Channel of Circulation, need not be all of the same material.
It may be partly Gold, partly Silver, and partly Copper : and
prices will be estimated by the whole quantity of Stuff which
fills the Channel of Circulation, and not by any particular portion
of it
h2
100 THEORY OF CREDIT
In modem times, a new kind of Staff is employed to a gigantic
extent to fill the Channel of Circalation : and that is Credit : or
Rights of action in various forms
With respect to Credit, there is a most important observation
to be made : Credits in some countries are made payable in Gold :
and in some countries in Silver
Now, Credits payable in Gold are exactly of the same value as
Gold : and Credits payable in Silver are of exactly the same value
as Silver
Hence the Value of Grold thronghout the world is determined
not only by the actual quantity of Gold, but by the aggregate
; quantity of Gold and all Credits payable in Gold
So the Value of Silver thronghout the world is determined not
only by the actual Quantity of Silver itself, but by the aggregate
quantity of Silver, aud all Credits payable in Silver
And, furthermore, the Value of Gold with respect to Silver, is
determined not only by the relative quantities of Gold and Silver
themselves : but by the ratio of Gold, and all Credits payable in
Gold, compared with the aggregate of Silver and all Credits payable
in Silver
It is the enormous Creation of Credit in modern times in the
form of Banking Credits and Mercantile Credits which has so
prodigiously raised the prices of products, and diminished the Rate
of interest in the last two centuries in this and many other countries,
as we shall show more fully hereafter
It will be shown hereafter that the Quantity of Credit which is
used and is in circulation in this country, is at least fifty times the
amount of Metallic coin
Furthermore, there are in some countries, like Russia, vast
quantities of inconvertible Paper Money, which are at a heavy
discount as compared with specie : but are at the same time of
their value in specie
Hence the thorough comprehension of the principles and
mechanism of the colossal system of Credit is the very foundation
of modern Economics
It is the quantity of Credit in modem times which chiefly
determines the Price of products : and variations in the quantity
of Credit produce more changes in the value of products than any
ON piacE 101
variations in the quantity of Gold and Silver : and it is the abuses
of Credit which produce those terrible calamities termed Commercial
Crises and Monetary Panics, which we shall have to investigate
afterwards
On Price
60. When any Economic Quantity is exchanged for any
other Economic Quantity, each is termed The Value of the other.
But when one or both of the Quantities exchanged is Money or
Credit, it receives a special name — it is termed Price. Price,
therefore, is always Value expressed in Money or Credit
Now the Value of Money is any other Economic Quantity
which can be obtained in exchange for it, either a material
chattel : or a service : or a Eight, such as a Debt
If Money be taken as the fixed Quantity, the more of the
other Quantity which can be obtained for it, the Greater is tlie
Value of Money. The less of the other Quantity which can be
obtained for it, the Less is the Value of Money
Or if the other Quantity be taken as the fixed Quantity, the
Less the Money given for it, the Greater is the Value of Money :
the More the Money given for the fixed Quantity, the Less is the
Value of Money
Hence it is seen thai— The Value of Money varies Inversely as
Price
But Credits, or Debts, are Commodities, or Merchandise,
which are brought into commerce, and bought and sold, or
exchanged, like any other merchandise
Now when any Commodities, or Merchandise, are brought
into commerce, they are always divided into certain Units for
the convenience of sale. Coals are sold by the ton : corn by the
quarter : tea and sugar by the pound : cloth by the yard : wine
ajid other liquids by the quart, or the pint, &c.
So, for the convenience of commerce. Bullion Ms divided into
certain Units called Coins
In a similar way, when the Commodity or Merchandise,
termed Credit, or Debt, is brought into commerce, it must, for
the convenience of sale, be divided into Units
102 THEORY OF CREDIT
The Unit of Credit or Debt is the Right to demand £100
to be paid one year hence
The sam of Money given to purchase the Unit of Debt is
akK> termed its Price : and as in all other sales, the less the
quantity of Money given for any fixed amount of Debt, the
greater is the Value of Money : and the greater the quantity of
Money}given to purchase any fixed amount of Debt, the less is
the Value of Money
And the less the amount of Debt a fixed quantity of Money
\rill purchase, the less is the Value of Money : and the greater
the amount of Debt a fixed quantity of Money will purchase, the
greater is the Value of Money
Hence the Value of Money with respect to Debts varies
exactly in the same way as it does with respect to any other
merchandise
But in the commerce of Debts it is not usual to estimate the
Value of Money by the quantity of Debt it will purchase. As
money naturally produces a profit, it is clear that the Value, or
Price, of a Debt to be paid only one year hence must be less than
the actual amount of the Debt. The difference between the
Present Value, or the Price of the Debt, and the amount of the
Debt is the profit made by buying it
This difference, or profit, is termed Discount
In the commerce of Debts it is universally the custom to
estimate the Value of Money by the Discount or Profit it yields :
and not by the Price of the Debt
Now as the Price of the Debt decreases or increases, it is
evident that the Discount increases or decreases ; and the Value
of Money measured in this way increases or decreases
Hence in the commerce of Debts, the Value of Money varies
Directly as the Discount
This rule embraces both branches of commerce —
The Value of Money varies Inversely as Price : and Directly
as Discount
ON INTEREST AND DISCOUNT 103
To Discount a Debt is to pay down the Present Value of its
amount payable at a future time
Hence it must be observed that the term Value of Money has
two distinct meanings in commerce. There are three great branches
of commerce : the commerce in material conmiodities : the com-
meixje in services : and the commerce in Debts. And the expression,
** Value of Money," has two distinct meanings, according as it
is applied to these three branches of conmierce : in the commerce
of material commodities or of services, it means the quantity of the
commodity or service which Money can purchase : in the commerce
of Debts it means the Discount, or Profit made by buying the Debt
On Interest and Discount
61. Profits made by trading in Debts are made in two ways —
(1) When the person who buys the Debt agrees to defer
receiving the Profit until the end of the time agreed on
In this case the Profit is termed Interest
Thus, when a person buys a Debt of £100 payable one year
hence at £5 per cent, interest, he pays the £100, and receives in
exchange for it the Eight to demand £105 at the end of the year
The Debt is the Price of the Money : and the Money is the
Price of the Debt
When the debtor pays the Debt he brings £105 in Money to
his Creditor, and buys up the Eight of action against himself to
that amount
Both these transactions are Sales or Exchanges : and acts of
commerce : and, therefore, enter into the Science of Economics
(2) Where the difference, or Profit, is retained at the time of
the purchase from the Price of the Debt
In this case the Profit is termed Discount
But Discount itself is of two kinds —
(a) In the ordinary books of Algebra it is said that Discount
is where the Profit is retained at the time of the purchase : and
the sum paid for the Debt is such a sum as, improved at the given
Sate of Interest, should be equal to the full sum of the Debt, ^t
the end of the period of advance
104 THEORY OF CREDIT
It is, therefore, the Present Value of the sum agreed upon, at
the agreed upon Rate of Profit. This may be called algebraical
Discount. It is used by Insurance Companies in determining the
Present Value of Future Payments : and in some other cases
(b) But this kind of Discount is never used by Bankers and
dealera in Money. In banking it is invariably the custom to
retain the full amount of the Profit agreed upon at the time of
purchasing the Debt
Thus, if a Banker discounts a Bill for £100 for a year at 5
per cent., he deducts and retains the full £5, and gives his customer
a Credit for £95. That is, he creates a Right of action for £95,
to purchase the Right to £100 at the end of the year
As this method of Discount is the one invariably used in
Banking, and Money lending, it may be termed Banking Discount
The Rate of Interest, or Discount, is the i-atio of the profit to
the amount of the Debt, made in some given time, as the year
The Profits made by Interest and Algebraical Discount are
exactly equal. But Banking Discount is the more profitable :
because, in the example given, in the former case, a profit of £5
is made on the advance of £100 : in the latter case on the advance
of £95
So long as the Rate of Discount is low, there is not much
difference in the Profits made by way of Interest and Banking
Discount. But, as the Rate increases, the Profit increases at a
very rapid ratio, as may be easily seen
If a person lends £100 at 20 per cent, interest : he advances
£100, and at the end of the year receives £120 : which is a profit
of 20 per cent.
If he Discounts a Bill for £100 at 20 per cent., he advances
only £80 : and, at the end of the year, receives £100 : which is
a profit of 25 per cent.
If he lends £100 at 50 per cent, interest, he advances £100 :
and, at the end of the year receives £150 ; which is a Profit of
50 per cent.
ON PRODUCTION 105
If he Discounts a Bill of £100 at 50 per cent., he advances
only £50 : and, at the end of the year, receives £100 : which is a
Profit of 100 per cent.
So, Discounting a Bill at 60 per cent, is a profit of 150 percent
If a person lends £100 at 100 per cent, interest : at the end
of the year he receives £200 : which is a Profit of 100 per cent.
If he Discounted a Bill for £100 at 100 per cent, he would
advance Nothing, and, at the end of the year, he would receive
£100 : or his Profit would be Infinite
It would be out of place to investigate here the whole Theory
of Banking Discount : but we have given a full exposition of the
subject in our 2'heory and Practice of Banking and Elements of
Economics
On Production
52. The word Production, as a technical term in Economics,
comes from the Latin, produceie, which means to lead, or bring
forth : or, to expose for sale
Thus, Thais, on the Eunuchus of Terence, says (Act I., sc. 2,
1. 55)—
** Pretium sperans, illico
Producit: vendidit"
** Hoping for a goodprice^ offers her therefor sale: sells her^^
So, Menedemns, in the Heauton Timorumenos, says (Act I.,
sc. 1., 1. 90)—
" Ancillas, servos . , .
Omnes Produzi, ac vendidi "
All the slaves, male and female j he offered for sale, and soW^
So, also, Suetonius, De illus, gram.^ c. 4, says —
" Quum familia alicujus produceretur "
" When any one^s household slaves tvere offered for sale "
The original sense of produce in English is exactly the same.
It is to draw forth, to cause to come near. Thus in Isaiah xli., 21,
it is said, "Produce your cause, saith the Lord : bring forth your
strong reasons, saith the King of Jacob." And the marginal note
says, " Produce — cause to come near "
106 THEORY OP CREDIT
80, Antony, Julius Cauar (Act III., sc. 1) —
«* That's all I seek,
And am moreover suitor, that I may
Produce his body in the market place "
So, Albany says in Lear (Act V., sc. 8) —
Produce their bodies, be they alive or dead "
So, when Mr. Montagne Tigg gives Mr. Jonas Ghnzzlewit and
party a dinner — *' It was as good a one as Money (or Ci*edit, no
matter whidi,) could Produce "
To Produce, is simply to bring forward something, and place
it where it is wanted. If a witness is told to Produce a deed or
document in Court, it means that he is to bring it into Court, and
place it there. A party to a cause Produces his witnesses in Court.
A gaoler is ordered to Produce the body of his prisoner in Court :
t.6., to place him there
In the universal language of commerce the Producer is the
person who brings anything into the market and offers it for sale.
When the turn of the market is for or against the Producer, it is
for or against the Seller.
Hence the true and original meaning of Production in Econo-
mics is to place anything in the market, and offer it for sale. A
thing may be produced in nature, but until it is offered for sale,
it is not Produced in Economics
A great poet m^i^ produce a great poem : a great artist may
p-oduce a great picture : a great sculptor may produce a great
statue : we may estimate their merits most highly : they may be
among the highest products of human genius : but how are we to
estimate their Market Value ? For that is the sole way in which
they enter into Economics. Hence, though the poem, the picture,
or the statue may be produced in nature, or called into existence :
they are not Produced in Economics until they are brought into
the market and offered for sale
So, in French, the original and primary meaning of Froduire,
as Littre says, is pousser en avant: and of production it is action
deprodidre, de mdtre en avant
ON PRODUCTION 107
A Product, in Economics, is anything whatever which is brought
into the market and offered for sale: whether Material, Immaterial,
or Incorporeal
It has been too much the custom in Economics to think of the
word Production as meaning bringing something into existence
only. But when it is seen that Production means placing some-
thing in the market and offering it for sale, it is evident that the
product must not only be called into existence, but transported
from one place to another
Hence, modern Economists expressly class Transport or OircU'
lotion as one form of Production
Thus, Destutt de Tracy ,^ under Production, includes changes
of form and place
J. B. Say enumerates Transport under the term Production.
Michel Chevalier does the same. Mill, who gives the first book of
his work to production, in the sense of obtaining things from the
earth, in a subsequent chapter, says,* '• Improvements in produe*
iioriy understanding this last expression in its widest sense to
include the process of procuring commodities from a Distance, as
well as that of producing them"
Hence Foreign Importers, Merchants, and Traders of all sorts,
wholesale and retail, are Producers : because they transport com-
modities from one place to another, and offer them for sale in the
places where they are wanted
Now Money is used to effect all these operations. Hence
Money used in any one of them is used as Productive Capital
But Credit is also used exactly in the same way as Money to
effect all these operations : hence Credit may be used in all
respects like Money, as Productive Capital
As far as regards the Customer, the tradesman in whose shop
he buys it is the Producer. "What difference can it make whether
that tradesman paid wages to workmen in his direct employment,
and carried the article from his workshop to his counter, or whether
' Traite cCEcoiwmie Politique^ p. 82
» Miwiplcs of Pol J£con.y Bk. IV ., c. 3, § 1
108 THEORY OF CREDIT
be pnrchaaes it from an iadependent mannfacturer in a town 300
miles off, and transports it from that place to his shop ? So far as
regards the costomer for whom the goods were made, the shop-
keeper is the prodnoer
All production is summed up in placing an article in the place
where it is wanted : and as Transport, Commerce, and Circulation
is iDdispensable for that object^ Circulation is one form of
Production
Three Claaaes of Economic Producers
63. Now, in general, there are three distinct kinds of opera-
tions necessary before a Commodity is placed in the market and
offered for sale to the final purchaser, who purchases the finished
product, and takes it out of commerce for personal use and
enjoyment
(1). Agricultural Producers. One class of persons obtains
the rude produce from the earth : this class includes agriculturists,
miners, hunters, fishermen, breeders of cattle, herds, &c., bring
them into commerce, and offer them for sale
(2). Manufacturing Producers. But when this raw produce
is first brought into the market, it is seldom fitted for final purchase
and human use, without undergoing several processes of manu-
facturing and fashioning
Manufacturers of all sorts purchase the raw produce from its
first or agricultural producers, and fashion and transform it by an
infinity of processes, so as to render it fit for human use
(3.) Commercial Producers. But after the raw produce of
the earth has by the yarious processes of manufacture been rendered
fit for human use, it has still to be transported from one country
to another, and from one place to another, in the same country,
before it is placed in the market, and finally offered for sale to the
consumer, who takes it out of commerce for his own use and
enjoyment
Now Money is used to effect all these operations : hence Money
employed in any one of them is used as Productive Capital
But Credit is also equally used in exactly the same way as
Money, to effect any of these operations. Hence Credit may be
used in all respects like Money as Productive Capital
PAYMENT AND SATISFACTION 109
On Payment and Satisfaction
54. The words PaymODt and Satisfaction are often supposed
to be synonymous^ but they are not so
The word Payment means anything whatever which is taken
in exchange for anything else
It comes originally from the Sanskrit Pa^, which is the same
word as the Greek ^lyyo), Doric wayoi, mjyvvfxi
In old Latin this was pago, or paco ; the same as paciscor ;
and dX^opango, pegi, or panxi, panctum, to covenant, agree for, or
come to terms with
Thus it is paid in the Laws of the xii Tables —
" Rem ubi pagunt, orato "
" J/ they come fo terms, let it be settled as agreed upon "
^' Ni pagunt in comitio aut in foro ante meridiem causam
conjicito "
" I/they do not come fo terms j bring on the cause before midday
either in the comitium or theforvm "
Hence pacare is to come to terms with : to appease : hence the
Italian pagare and our pay
When one person has delivered anything to another person,
or done him a service, he is entitled to receive from him
some equivalent ; unless it was meant as a donation. But at
the same time he has the right to consider anything he pleases
as equivalent
Thus, where two persons agree to exchange any material
products, each in payment of the other : because each satisfies and
appeases the claim the other has for an equivalent. When goods
are paid for in Money, it is sometimes supposed it is only the
Money which is Payment for the goods. But the goods are equally
payment for the Money. Because each person has got what he
agreed to take in exchange for his product
So, when Money is paid as Wages for work done, the Money
is Payment for the Work : but the Work is equally Payment for
the Money
110 THEORY OF CREDIT
So, when persons agree to exchange different kinds of work :
each is Payment for the other
So, when a merchant agrees to take a trader's Bill at three
months in exchange for goods : the Bill is Payment for the goods.
It appeases the claim of the merchant : because he has agreed to
take a Right of action in exchange for the goods. And the goods
are equally Payment for the Right of action. When the Bill
becomes due the trader has to pay his Bill : that is, he has to
appease the claim which the owner of the Bill has for the Money.
And when he pays the Bill, he buys up the Right of action against
himself
The Money is the Payment for the Right of action : and the
Right of action is Payment for the Money
Hence, to Pay means simply to appease : when a man pays
a Debt, he appeases the Right, or Claim, which his Creditor has to
demand a sum of money from him. When he pai/s his Rent he
appeases the Right which the owner of the house, land, &c., has
against him for compensation for its use
But it does not follow that a Payment is the final closing of the
transaction. The only legal word which denotes the final closing
of the transaction is Satisfaction. If a Bill is taken in exchange
for goods, it is Payment : but it is not Satisfaction (unless it is
expressly received as such) until the Bill itself is paid
If, however, the owner of the Bill neglects to follow up his
legal remedy, the Bill becomes not only Payment but Satisfaction :
by doing so, the owner of it makes it Money
And Economists go further : they say that Money itself is
only a higher order of Bill : that, though, when a person has
received Money it is Payment, but it is not Satisfaction, until he
has exchanged away the Money for some object he desires
Thus, though a shoemaker is paid when he has got Money for
his shoes : yet he has not got a Satisfaction until he has got bread
or meat, or clothing, or something else he desires in exchange for
Money
ON CAPITAL 111
On Capital
65. Adam Smith's use of the word Capital strikingly
exemplifies the defect of his definitions. He emimerates as
Capital (1) Material Things : (2) Personal Quahties : (3) Bank
Notes, Bills of Exchange, &c., which are abstract Rights, or Credit
Now, when we are told that these things are Capital, we have
no more idea what Capital is than if we were told that they are
Abracadabra
We do not want an enumeration of what things are Capital,
but we want a Definition of what Capital is
The word Capital is derived from the Latin Caputs which
means the source of a spring, or the root of a plant — namely, the
source from which any increase flows
Thus Plautus says —
" scelerum Caput." — ** source or fountain of crimes "
** Perjurii Caput." — " fountain of perjuries"
Stephen, in his Thesaurus, thus defines the word :
** Kc^ctXatov — Caput unde fructus et reditus mauat :"
" Capital — the Source from which buj Profit or Revenue flotos "
So Senior says — " Economists are agreed that Whatever gives
a Profit is properly termed Capital "
And de Fontenay says — " Whei'ever there is a Revenue you
perceive Capital "
This is a good general Definition : and the *' Whatever gives
a Profit " must be interpreted in as wide and general a sense as
the " Anything whose Value can be measured in Money " is in
definition of Wealth
The definition of Capital is, therefore, this —
" Capital iijft^any Economic Quantity used for the purpose of
Profit "
Any Economic Quantity whatever may be used as Capital
56. Now any Economic Quantity whatever may be used in
two different ways —
112 THEORY OF CREDIT
(1) The proprietor may use it for his own personal enjoyment
(2) He may trade with it : i.e., he may use it so as to produce
a Profit
When any Economic Quantity whatever is used so as to
produce a profit — it is termed Capital
Economic Quantities, it has been shown, are of three distinct
orders: (1) Material Things: (2) Personal Qualities, both in
the form of Labor and Credit : Abstract Eights
And each of these Quantities may be used in either of the
above ways
1. Material Things. Suppose that a person has a sum of
Money. If he expends it on his own personal gratification or
household expenses, such Money is not used as Capital ; because
he makes no profit by it
But if he lends it out at interest : or if he buys goods with it
for the purpose of selling them again at a profit : or if he buys
into the Funds : or the Shares of any commercial company : then
he uses his Money as Capital : and the goods are also Capital,
because he intends to sell tbem at a profit : and the Funds and
'the Shares are also his Capital, because they produce him an
annual revenue
So if the owner of land lives on it himself, and uses it for
his own personal enjoyment : he does not use the Land as Capital
But if he lets it out to farmers : or to builders to build houses upon :
and receives a Rent for so doing : then he uses the Land as Capital
Some great noblemen possess large tracts of Land upon which
part of London is built : that Land yields them an enormous
Revenue : and, therefore, it is Capital to them
And so any material thing whatever may be used as Capital
So if a person spends money merely on a general education of
which he makes no profitable use: that Money is not used as Capital
But, if he spends his Money in acquiring a professional
education, such as that of an advocate, or a physician, or surgeon,
or an engineer, or any profession by which he intends to earn an
income : then he uses the Money as Capital
ON CAPITAL 113
(2) Personal Qualities. — Personal Qnalities may also be used
in both ways. But Personal Qnalities are of two forms — ^they are
of the form (a) of Labor, and (b) of Credit
(a) Personal Qualities as Labor. — If a man digs in his own
garden for his amasement, or if he sings, acts, or gives lectures
for the delectation of his friends — such Labor is not used as
Capital
But if he sells his Labor in any way for Money, then he uses
his Labor as Capital
Thus, Huskisson said — ''He bad always maintained that
Labor is the poor man^s Capital "
So, Mr. Cardwell, speaking to his constituents, said — ^^ Labor
is the poor man's Capital "
'' So, a writer in a daily paper, speaking of the Irish peasants,
said — '' The only Capital they possess is their Labor, which they
must bring into the market to supply their daily wants "
And speaking of them the Economist said — " They have no
Capital but their Labor *'
So Fronde says in Oceana — " And the land would be within
the reach of poor men who have no Capital except their
Labor "
So Cardinal Manning says — '' I claim for Labor the rights of
Capital. It is Capital in the truest sense. . . . The Capital
of Money and the Capital of strength and skill must be united
together"
So, his knowledge, skill, and abilities, are Capital to any one
who earns an income as an advocate, physician, singer, engineer,
or as manager of a great commercial company, or in any other
profession. His services are wanted, demanded, by his clients,
and paid for : and thus their Value is measured in money — hence
they are x/owara, or Wealth : and as he makes an income by them,
they are Capital
This income is measurable and taxable just in the same way
as if he made an income by selling corn, cattle, or any other
material chattels
114 THEORY OF CREDIT
All modeni writers admit that Labor is a commodity which
can be boaght aod sold like any material chattel: and, consequently,
it is Wealth : and as it can be sold for a profit it may be used as
Capital
(b) Persmal Qualities as Credit.~So, Personal Credit may
be used in two ways. If a person bnys goods for his household
nse, or for personal enjoyment, soch Credit is not nsed as Capital
Bat a merchant may use his Personal Credit for the purpose
of Profit : and therefore as Capital
He may use it for the purpose of purchasing goods, materials :
or in employing Labor, by giving a Promise to pay at a future
time, instead of actual money. He sells the goods and makes a
profit by so doing, just as if he had paid for them in Money
Or he may employ Laborers by means of his Credit, and sell
the products for more than they cost : and so make a Profit : in
this way he uses his Personal Credit as Capital
When Personal Qualities, either in the shape of Labor or
Credit, are used in this way to prodnce a Profit, they are termed
Personal Capital
(3) Bights. — ^When Personal Credit is nsed as Purchasing
Power, a Right of action, or an Economic Quantity of the third
kind is created. And as this Right of action may be bought and
sold, or exchanged like any material chattel, it is termed Fecunia,
Res, Bona, Merx in Roman Law : XP^H-^ ''pay/ia, &c., in Greek
Law : Goods and Chattels, &c., in English Law. The trafiic in
these Rights of action is the most colossal branch of modern com-
merce ; and is the subject matter of this work ; so we shall say
nothing more of them here
But any other Right may be used as Capital. If a man bnys
the Funds or Shares in a Commercial Company : or municipal and
other obligations, such as Railway Debenture Stock : all these and
many other classes of Rights prodnce him a Profit : hence they
are Capital to him
So, the Copyright of a successful work is Capital to the author :
and if he sells it to a publisher it becomes his fixed Capital
CAPITAL MAY INCREASE IN TWO WAYS 115
There is a class of traders whose basiness it is to buy and sell
Bights exclusively : such as Shares in Commercial Companies and
Public Securities of this nature : and they keep a stock of this
kind of Property on hand, just as other traders keep a stock of
material goods
Capital may Increase in two distinct ways
67. Capital increases in two fundamentally distinct ways
(1.) By actual increase of Quantity : as cattle, flocks and
herds, and all the fruits of the earth increase by adding to their
number or Quantity
(2.) By Commerce or Exchange: that is, by exchanging
away something which has a lower value in a place, and obtaining
something in exchange for it of a higher value
Money is used as Capital, and produces a profit by the second
of these methods. Money is used as Capital either by advancing
a sum of it, and acquiring a Eight to be repaid a larger sum at a
future time : or by buying goods which are to be sold for a higher
sum than they cost : or by employing Labor to produce commodities
and selling them at a higher price than the cost of the Labor
It is also clear that any Economic Quantity which is used as a
substitute for Money, and produces exactly the same effects as
Money, may be nsed as Capital as well as Money : by the force of
the definition which Senior says all Economists are agreed in
Hence if a merchant or trader can purchase goods or labor
with his Credit : by giving his promise to pay at a future time —
and can sell the goods at a higher price than he paid for them in
Credit, and so make a Profit after paying and discharging the
Debt he incurred in buying them — then it is clear that his Credit
is Capital to him, exactly in the same way and in the same sense
that Money is
Take a very simple example. Suppose that a trader buys
goods for £100 : and sells them for £125 : he first replaces his
original Capital of £100 : and then he has a surplus of £25. He
is, therefore, better off by £25 at the end. of the operation than
he was at the beginning : and he has used his Money as Capital
12
116 THEORY OF CREDIT
On the other hand, suppose that the trader saw that he conld
make a profit if he had the means to purchase goods. But
suppose that he has no Money and no Credit : then he can
purchase no goods : and he can make no profit
But suppose that he has Credit : that is, that the owner of
the goods has confidence in his skilly integrity, and character — he
may sell him the goods, and take in exchange for them his
promise to pay at a future time, instead of actual money
Now as the payment is deferred, and there is always some risk
of failure of payment, the price in Credit is always higher than
the price in Money
Suppose that the price in Credit is £105 : then, as before, the
trader sells his goods for £125. At the agreed upon time he
discbarges the Debt of £105 : and he has a profit of £20. That
is, he is better oflf by £20 at the end of the operation than he was
at the beginning : and thus he has used his Credit as Capital
Now by the purchase with Money he is £25 better oflf at the
end of the operation than he was at the beginning : and by the
purchase with Credit he is £20 better off than he was at the
beginning. It is true that he does not make so great a profit by
Credit as by Money : but yet he has made a profit by his Credit
which he could not have made without it
Hence, by the very definition, his Credit has been Capital to
him : and it has produced exactly the same circulation of com*
modities that Money would have done
Hence it is clear that Credit is Productive Capital exactly in
the same way, and in the same sense, that Money is
Thus we see how a clear and distinct understanding of defini-
tions removes all .doubts and difficulties. Many pei-sons have
found it very hard to understand how Credit is Capital. But
that entirely depends on the definition of Credit and the defini-
tion of Capital. When it is agreed that anjrthing which has
Purchasing Power is Wealth : all difficulty vanishes. Because
Money is Purchasing Power and also Credit is Purchasing Power.
And a trader's purchasing power is his Money and his Credit.
Therefore his Money and his Credit are equally Wealth to
him
NO ABSOLUTE CAPITAL 117
And as we have seen that the definition of Capital is
"Anything which produces a Profit," and. that a trader makes a
Profit equally by his Money and his Credit : it necessarily follows
that he may use his Money and his Credit equally as Capital
Thus the expression that ^' Credit is Capital," which has called
forth so much dissent in recent times, simply means that com-
merce is carried on by means of Credit, by Bank Notes and Bills
of Exchange, as well as by Money
The meaning of Capital as denoting anything by which a
profit can be made is constantly used in the common lauguage of
politics. Thus, where one party in the State makes an error :
the other party is said to make ^^ Capital " of it ; f .«., turn it to
their own profit : or when the Government achieves a great
military or political success, it is said to make " Capital *' of it
i.e., turn it to their own profit
So Cobden says in a letter — " They have traded for the last
fifteen years as a political party on the Irish question : but now
that Capital is exhausted "
Hence Capital is anything whatever which a person trades
with, and makes a profit by
There is no such thvig as Absolute Capital
68. It has been shown in a preceding section that there is
no such thing as Absolute Wealth : that is, there is nothing
which is in its own nature, Wealth, and that whether anything
is Wealth or not depends entirely upon Human Wants and
Demand
So also it must be carefully observed that there is no such
thing as Absolute Capital
As Mill observes, the distinction between Capital and non-
Capital does not lie in the kind of commodity, but in the mind
of the owner. That is, that whether anything is Capital or not,
in no way depends on the nature of the thing itself, but solely
and exclusively on its method of use
118 THEORY OF CREDIT
Many writers from an imperfect knowledge of the subject say
that Capital is simply the accnmiilation of the products of past
labor. But this is a vital error which must be carefully guarded
against. Because all the accumulated products of past labor are
not Capital ; but only that portion of them which is traded with,
or used for the purposes of profit
Moreover, many things may be used as Capital which are in
no way the accumulated products of past labor. As Senior says,
" Economists are agreed that whatever gives a profit is properly
termed Capital." Now it has been shown that any Economic
Quantity, whatever its nature may be, may be used as Capital.
Not only may many material commodities be used as Capital
which are not the products of past labor, such as the land : but
Personal Qualities, both in the form of Labor and Credit, may
be nsed as Capital : and also Incorporeal Quantities may be
used as Capital, or for the purposes of profit, as well as any
material chattels. In fact, in this great civilised country, the
enormously greater amount of Capital is purely Personal and
Incorporeal
Some statisticians, indeed, endeavour to estimate the amount
of Capital in the country. But it is evident that such attempts
are wholly futile : because it is utterly impossible to estimate the
amount of Economic Quantities which are being used as Capital
at any given instant : and it has been shown that persons trade
with and make a profit of, not only the realised profits of the
past, but also with the expected Profits of the Future
On Fixed and Floating, or Circulating, Capital
69. We have seen that there is no such thing as Absolate
Capital : that whether any Economic Quantity is Capital or not,
depends entirely on its method of use
But Capital itself may be used in two different ways —
1. The Capitalist may retain the object used as Capital in
his own possession, and make a continuous series of profits by its
use : and consequently the Capital, supposing it to be worn out,
is only replaced with the profits in a series of instalments. Capital
used in this way is termed Fixed Capital
FIXED AND CIRCULATING CAPITAL 119
2. The Capitalist may part with it entirely : and replace the
Value of the Capital and the property in one operation : hence it
goes away from him entirely, and is replaced in one operation.
Capital used in this way is termed Floating, or Oircolatinffi
Capital
It must be clearly understood that it is entirely according
to the intention of the person who uses it, and the purpose
and method in which it is used, that it receiyes either of these
names
The same article may be Floating Capital in the hands of one
person and Fixed Capital in the hands of its next possessor ; if
the first produces it for the purpose of selling it outright, and so
replaces the sum expended in producing it in one operation : and
the second purchases it for the purpose of making a profit by its
continuous use
This distinction is often overlooked, and the term Fixed Capital
is applied to articles of a fixed nature : and the term Floating, or
Circulating Capital, to articles of another nature
Thus Smith enumerates four kinds of fixed Capital —
1. The useful machines and instruments of trade which facilitate
and abridge labour
2. Buildings used for purposes of profit both by their pro-
prietor and by those who pay rent for them for trading purposes
3. Improvements in land
4. The acquired and useful Abilities of all the members ot
the society
This enumeration is imperfect, because Smith omits all that
stupendous mass of Incorporeal Property which has increased to
such a gigantic extent in modern times
Thus, if a person invests his money in the Funds : or in the
Shares of a commercial company of any sort : or in Railway
Debentures : or in Municipal loans : or the obligations of other
public bodies : or in purchasing the goodwill of a business : or in
a Professional Practice : or in Copyrights or Patents : or in any
other Incorporeal Property which yields a revenue : all these are
Fixed Capital to their purchasers
120 THEORY OF CREDIT
Smith also enamerates fonr kinds of Floating, or Gircnlating,
Capital —
1. The Money by means of which the other three are circalated
and difitributed to their proper consumers
Under the term Money he includes Bank Notes, Bills of
Exchange and other secarities for Money. But all these paper Docu-
ments are mei*ely Eights of action, or Credit: hence Smith expressly
includes Credit under the term Floating, or Circolating Capital
2. The stock of provisions in the hands of the farmers, citizens,
butchers, corn merchants, brewers, &c.
3. The materials in the hands of different workpeople to be made
np, clothes, furniture, &c.
4. The work which is made and completed, but still remains
in the hands of the merchants and manufacturers, but not yet dis-
posed of, or distributed to the proper consumers : such as the
finished work in the shops of the smith, cabinet maker, goldsmith,
jeweller, china merchant, &c.
It must be carefully observed that Smith's distinction of certain
articles as absolutely Fixed Capital ; and of other articles as abso-
lutely Circulating Capital, is to a great extent erroneous
If a person buys land for the purpose of farming it himself for
profit : or of letting it out out to farmers : or if he buys or builds
houses for the purpose of letting them out to tenants : then such
lands and houses are Fixed Capital
But it is quite common for speculators to buy up land and build
houses for the express purpose of selling them again : and so re-
couping their outlay in one operation. In the hands of such,
speculators lands and houses so treated are Circulating Capital
Some manufacturers build engines, which are sold to Railway
Companies : or agricultural implements, which are sold to farmers :
or machinery, which is sold to manufacturers. In the hands of the
makers, these engines and machinery are Floating or Circolating
Capital : because they are made for the pm-pose of being sold
outright : and so changing hands : and their whole price and profit
is recouped in one o[>eration. When they come into the hands of
the Eailway Companies, the farmers, and the 'manufacturers, they
become Fixed Capital : because they remain in the possession of
their owners, who only recoup themselves gradually for their wear,
tear, and deterioration in a series of profits
FIXED AND CIRCULATING CAPITAL 121
So, a shipbuilder builds ships and sells them to a shipping
Company : in the hands of the builders, these ships are
Floating Capital : in the hands of the company, they are Fixed
Capital
And so many other instances might be quoted
On the other hand many articles which are usually
Floating Capital may become Fixed Capital
Furniture, clothes, and plate are usually Floating Capital :
because they are usually made for the purpose of being sold
But sometimes they are retained in the hands of their owners,
and let out for hire : and then they become Fixed Capital
If a person purchases the Funds : or Shares : or Railway
Debentures for the purpose of investment, and so deriving an
income from them : they are Fixed Capital to him. But there
is a class of traders termed Stock Jobbers, who buy this class of
property, with the intention of selling it again with a profit, and
they keep a stock of Stocks and Shares, as other traders keep a
stock of Goods : in the hands of these Stock Jobbers these
Securities are Floating Capital
Another class of traders, named Bankers, make a special
business of buying Debts, i.e., discounting Bills of Exchange.
The Bills in the portfolio of a banker are exactly like the goods
in the hands of a trader. The trader buys goods from one
person at a lower price in order to sell them at a higher price to
other persons : and, as Smith says, they are Floating Capital to
him. The banker buys Bills of Exchange, which are merchandise,
from one set of persons, his own customers, and sells them at a higher
price to other persons, namely, the acceptors: and so make a
profit. Hence the Bills in the portfolio of a banker are Floating
Capital to him, exactly as the goods in the shop of a trader are
Flouting Capital to him
It is, therefore, incorrect to apply the terms Floating, or Fixed,
Capital, absolutely to any articles, whatever their nature may be,
unless we know the method in which their owners employ them.
And unless an object is incapable of being applied to more than
one of these purposes, it is not correct to call it by either name
absolutely
122 THEOBY OF CREDIT
There are very few things to which the name of Fixed Capital
may be invariably applied. The only class of Economic Quantities
which are invariably Fixed Capital are Personal Qualities : persons
cannot devest themselves absolutely of their qualities : they can
only make an income by their nse : and, therefore, they are
necessarily Fixed Capital
On the other hand. Money and all articles of consumption,
such as com, wine, oil, coals, meat, &c., are necessarily Floating
Capital: because it is not possible to make a profit by them,
except by absolutely parting with them
Almost all other property is capable of being employed in
either way at the will of its owner : and, therefore, is Fixed, or
Floating, Capital, according to the method it is used
On the Three Ambigaities m the Theory of Credit or Debt
60. We have now to notice three perplexities or Ambiguities
in the Theory of Credit, or Debt, which have been the cause of
an immense amount of confusion and misconception, which the
reader must carefully observe
First Ambiguity.— il Debt is not the Money owed by the
Debtor, but the Abstract Personal Duty to pay the Money
1. "We have now to explain the meaning of the word
Debt, about which there is a gi'eat misconception. It is one of the
examples of words, which, in early jurisprudence, and classical
Latin, meant a Material thing, but has come in the progress of
civilization and jurisprudence to mean a Bight, and a Duty
We think it absolutely certain, in which we are confirmed by
the authority of Professor H. Nettleship, of Oxford, that in
classical Latin the word Debitum means the actual material chattel,
or the Money which is due
But, in the Pandects, the word Debitum is used as synonymous
with Obligatio ; or Contract : and, therefore, includes both the
Creditor's Right to Demand, and the Debtor's Duty to Fay
The idea that the word Debt means the Money due is very
common at the present day, and has greatly impeded the due
apprehension of the nature of Credit
FIRST AMBIGUITY 123
Many literary and mathematical writers suppose that a Debt is
the Money due, or Money in the Debtor's possession, to which the
Creditor has a Eight
This very common error, of which we shall hereafter produce
several examples, is expressly provided against in the Digest
Dig.yXliv., 7, 2. '' Obligationum substantia non in eo consistit
nt aliqaod Corpus nostrum faciat : sed ut Alium nobis adstriugit
ad Dandum aliquod, vel Faciendum, vel Prsstandum "
'^ The essence of Obligations does not consist in this that it makes
any specific Ooods our property : but that it binds some Person to
Pay us something : ortoJio something : or to guarantee something "
Pothier well observes^ — **The Bight which the Obligation
gives the Creditor of proceeding to obtain payment of the thing
which the Debtor is obliged to give him, is not a Right in the
thing itself (Jus in re) : it is only a Right against the Person
of the Debtor for the purpose of compelling him to give it (Jus
ad rem acquirendam). The thing which the Debtor is obliged to
give continues to belong to him, and the Creditor cannot become
proprietor of it except by the delivery, real or fictitious, which is
made to him by the Debtor in the performance of the Obligation
"And, till this delivery is made, the Creditor has nothing more
than the Bight of demanding the thing : and he has only that Right
against the Person of the Debtor who has contracted the Obligation
" Hence, it follows, that if my Debtor, after contracting an
Obligation to give a thing to me, transfers it upon a particular
title to a third person, whether by sale or donation, I cannot
demand it from the party who has so acquired it, but only from
my Debtor. The reason is, as the Obligation does not, according
to our principle, give the Creditor any Bight in the thing which
is due to him, I have not any Bight in the thing which is due to
me, that I can pursue against the person in whose hands it may
be found"
This doctrine is most true. Suppose a Creditor comes to his
Debtor and demands payment of his Debt, and the Debtor has
the very money wherewith to pay his Debt in his hand, he may
Btill, nevertheless, give it away, or spend it under the very eyes of
his Creditor : and the Creditor has no legal Bight to prevent him
' Traite 8ur Us ObligatioM
124 THEORY OF CREDIT
So Gide say^ — ^'^ A Debt is not the Material object, the Money :
bat the Juridical object, the Duty to pay "
So "Williams says' — "Every person who borrows money on
mortgage or not, incurs a Debt or Personal Obligation to repay
it out of whatever means he possesses ''
The distinction is perfectly plain, and of the greatest importance
in Economics. If the Creditor has the Right to any specific
money in the Debtor^s possession, that would be a diminution of
the Debtor's property : he would have no Right to spend or part
with it : and there would be only one Economic Quantity in
existence : i.e., the quantity of money
But, as a matter of fact, the whole of the money remains the
Debtor's property, which he can sell or exchange, as he pleases :
and also there is the property, or Right, in the person of the
Creditor, which he can sell or exchange, as he pleases : and which
may be sold or exchanged any number of times till it is paid off
and extinguished. Hence, in this case, there are two Economic
Quantities in existence, which may each circulate in commerce at
the same time
To consider a Debt as a sum of money in the Debtor's possession
to which the Creditor has a Right, is to confound the distinction
between a Trustee and a Debtor. A Trustee merely holds money
which is, in reality, the property of the Cestui que trust : and has
no right to use it for his own purposes : it foims no part of his
property : and therefore there is only one, and not two Economic
Quantities in existence
If the Creditor's Right were the Right to a specific sum of
money in the Debtor's possession, it would follow that a Debtor
could never be insolvent : because if he had no money, his Creditor
could have no Right. But unfortunately this is far from being
the case. In too many cases persons are insolvent : i.e,, they are
under the Duty to pay money, and have no money to pay it with :
but the Creditor's Right to demand exists whether the Debtor has
any money to pay it or not
* De la Novation^ p. 139
• Law of Personal Property ^p, 304
SECOND AMBIGUITY 125
If the Creditor's Bight were the Right to a specific sum of
money, it would follow that the Quantity of Credit would never
exceed the Quantity of Money : but this is entirely contmry to
fact : because the Quantity of Credit in existence and in circulation
in this country is certainly more than fifty times the Quantity of
Money
Hence the reader must carefully observe that a Debt is simply
the abstract Personal Duty to pay money, and has no reference
to any specific sum of money
Second Ambiguity. — The word Debt means both the Creditor's
Bight of action and the Debtor's Duty to pay
2. The second Ambiguity is this. It has been shown that
the word Debt means the Debtor's Personal Duty to pay money —
and not the Money which is due. But it has long been used both
in Law and Common usage to mean the Creditor's Bight of action
as well : and is thus used as synonymous with Credit. And a
Creditor's Eight of action is termed perfectly indiscriminately a
Credit and a Debt
It has been said above that in juridical Latin the word Debt-
turn is used as synonymous with Obligatio: and, therefore, it
meant a Contract: and therefore includes both the Creditor's Eight
of action as well as the Debtor's Duty to pay
In Classical Latin a Creditor's Right of action was termed
Nomen. But in course of time, while Obligatio always continued
to mean the Contract, the word Dehitum split up into two
parts, and is now used indiscriminately with Credit, to mean the
Creditor's Bight of action
In the twelfth century the word Debitum was commonly used
to mean a Eight of action. In 1194, Richard I. issued instruc-
tions for a judicial visitation on financial matters, in which it was
ordered —
^' Omnia Debita Judaeorum inbrevientur, terras, domus, reditus,
et possessiones "
" Let all the Debts (i.e., Rights of action) of the Jews he
scheduled^ their landsy houses^ rents and possessions "
126 THEORY OF CREDIT
^'Item qnilibet Jadseus jurabit super rotuliim quod omnia
Debita sua et vadia, et reditus, et omnes res, et possessiones suas
inbreviari faciat "
'* Also let every Jew swear that he will make a true return of
all his Debts (Rights of action), pledges, rents, and all his Property
and possessions "
In mediaeval charters the word Debitale was used in the same
sense. Thus, in one of 1324, it says —
In omnibus et singulis bonis .... dominiis, baroniis,
censibus, redditualibus, Debitalibus, servitutibus, homatgiis"
" Fn all and singular goods .... lordships, baronies,
revenues, rents. Debts (Rights of action), servitudes, homages^'
In another, of 1374, it is said —
'^ Aquisiverunt redditus, census annuos, et Debitalia in
foedis quorum redditorum, censunm, et Debi-
talium "
** They have acquired rents, annual revenues^ and Debts (Rights
of action) in fee . . • . of which rents, reve^iues, and "Debts
(Rights of action)'*
Thus the words Dehitum and DeUtale were already, at this
period, used to mean Rights of action in public instruments : and
if they were so used in public instruments, it is clear that that
must have been their well understood meaning in common usage
And in English Law the word Debt has long been used to mean
a Right of action
Thus, in the Statute of Acton Burnell, 11 Edward I. (1283),
commonly called the Statute of Merchants, it is said —
" Pur ceo qe merchauntz qi avaunt ces houres unt preste lur
aver a diverse genz, sunt cheuz en poverte, pur ceo qe il ni aveit
pas si redde ley purvewe, par la quele il poeint Inr Dettes
hastivement recoverir
Le Rei par luy par sun conseil ad ordine e establi, qe mar-
chaunt qi veut estre seur de sa Dette . ... ."
E si le Meire ne troesse achatur face par renable pris liverer
les moebles al Oreauzur, desqe a la summe de la Dette en
allowance de sa Dette • • • •"
SECOND AMBIGUITY 127
By which it appears that at that time the word Debt had
already acquired in Engh'sh Law the meaning of a Bight of
action : a meaning which it has ever since retained both in Law
and common nsage
So it is said in " Les Termes de la Ley," first published in
1567—
'^Dett est un brief que gist Ion ascun snmme d'argent est
dne an un per reason d'accompt, &c."
" Debt is a Writ," &c.
So Ashe says —
'' Quel Det, Duty, Chose-in-action on Droit "
So, in the Act, 46 Geo. IIL (1806), c. 125, s. 3, it is enacted
that — '' one Debt or Demand may be set off against another"
So, Mr. Williams says —
'' Within the class of Choses-in-adion was comprised a Bight
of growing importance, namely, that of suing for Money due :
which Right is all that is called a Debt "
^* We have seen that a Debt was anciently considered as a
mere Bight to bring an action against the Debtor "
** When a Debt or Demand is equitable only "
*' Debts being formerly considered as mere Bights of
action "
So, as may be seen in any daily paper, the executors of
deceased persons advertise for any persons who have " Debts,
Claims, or Demands " against the estate, to give in a statement
of them
Ortolan says—" Sous le premier point de vue le droit personnel
se nomme chez nous Creance : chez les Remains Nomen, moins
generalement Greditum '*
Which Messrs. Prichard and Nasmyth translate —
'^ Under the first point of view a Personal Bight is called by
us a Debt : among the Romans Nomen, less usually Creditum "
In which they are right, because CHance, in French, is the
Right of action which a Creditor has against a Debtor ; which is,
as we have seen, the meaning of Debt in English Law
128 THEORY OF CREDIT
It 18 80 perfectly well known that in English Law the word
Debt means both t)ie Creditor's Eight of action and the Debtor's
Daty to pay, that it is used in both senses in the same Act of
Parliament
Thns, in the Supreme Court of Judicature Act, 36 and 37
Vict. (1873), c. 66, s. 28, § 6, it is said—
'* Any absolute assignment in writing under the hand of the
Assignor of any Debt or other legal Chose-in-action . . • . "
where the word Debt means the Creditor's Bight of action
But in the same section, § 1, it is said — '* Whose estate may
prove to be insufficient for the payment in full of his Debts and
Liabilities .... as to Debts and Liabilities provable"
Where the word Debt means the Debtor's Duty to pay
An administrator is appointed by the Court of the " goods,
chattels, and Credits " of the deceased
Thus it is seen that the words " Credit " and " Debt " are
used synonymously in Law to mean a Creditor's Bight of Action
It is exactly the same in common usage. A person makes his
will, bequeathing his Debts, f>., his Bights of Action
Accordingly in the Digest of the Law of Bills of Exchange
which we prepared for the Law Digest Commissioners, we began
with this fundamental definition —
" Credit or Debt in Legal and Commercial [and Economical]
language, means a Bight of action against a Pei'son for a sum of
Money "
So in the Law of Scotland Debts are included nnder the title
of movable Bights : and in a Scotch marriage contract it is usual
for the bride to transfer to her intended husband ''all goods,
gear. Debts, sums of money, and other movable estate "
We need not give any more examples. The reader must
carefully observe that the word Debt is used both in English
Law and common usage, quite indiscriminately to mean both the
Creditor's Bight of action and the Debtor's Duty to pay : and it
requires constant vigilance to perceive in which sense it is used
SECOND AMBIGUITY 129
The word Duty also originally meant a Bight : thus the
King's Duties meant his Right to levy customs. This meaning
appears in the extract from Ashe above cited : bnt it is seldom
used in this sense now
The word Bight had also this donble meaning in English.
Thus Lord Shelburne said in the House of Lords — ** He would
think that America had as good a Bight to pay taxes as Britain,"
i.e.y it was as much their Duty to do so
The word Bight is not very commonly used in this sense in
England at the present day : but it is quite common in Scotland
to say — ^' I have no Bight to do that/* i.$., it is not my Duty to
doit
The word xP^os in Greek has also this double meaning : it
originally meant the actual thing owed, like Debitnm in Latin :
or the Duty to pay it : but the Greek jurists used xp^o^ to mean
the Bight of action
Thus, Demosthenes says —
**ryv ov(riav airaxrav XP^^ KoriXive '*
^^Be left all his Property in outstanding Debts, i.e., Rights
of action
^^ In the Basilica x/^os is used as synonymous with nomen,
Or^ancOf a Bight of action
So in German, the word Schuld properly means a Debt or
Liability : accordingly, Schuldner properly means a Debtor : but
Austin says that Schuld has also the double meaning : and that in
German Law Schuldner is often used to mean the Creditor
In French the words Droit and Dette are also used in the
double sense of the Bight and the Duty : but in the Creditor's
case it is termed the Droit or Dette active : in the Debtor's case
it IS termed the Droit or Dette passive
Thus Littrfe says —
<< Dettes Actives : celles qu'on a U droit d^exiger h payemenV*
<< Dettes Passives celles qu'on est obligi de payer**
130 THEORY OF CREDIT
Creance : Droit d'exiger raccomplissement d'nne obligation :
.... on oppose les droits de creance an droits r^els "
That is, personal Rights, or Jura in personam^ are distinguished
from Real Eights, or Jura in re
Thns, the student must carefully observe that all these words
denoting a Contract or Obligation between two persons : such as
Xpcos, Debitum, Debitale, Duty, Debt, Right, Droity Dette, Schuldy
are used quite indiscriminately with respect to both parties : and
it requires constant vigilance to determine in which sense they are
used
The explanation of this seeming confusion is this : xpcos comes
from xp7> it is fit, or oi-dained : Debitum means that which is due :
Right from rectum, that which is ordered : and if one person has
the Right to Demand, and another person has the Duty to pay, a
sum of money, it is equally fit : due : ordained : and Right : that
the one person should receive as that the other should pay : hence
they are equally xp^a : Debts : Duties : and Bights
On the Continent it is usual to term a Person's Rights, simply
his actif: and his Liabilities simply his passif: the words Droit
or Dette being understood : thus, in the accounts of a Bank, its
Liabilities are termed its Passif : and its Assets its Actif
Third Ambig^ty : On the double meaning of the words ^^ Lend,"
"Loan," "Borrow;" or the Distinction between Mutuum, Savciov,
or Sdv€ia-fiay and Commodatum or to \pi](rdfi€vov
3. The third Ambiguity has been the cause of most of
the confusion in modern times on the subject of Credit
When persons hear for the first time such an expression as
" Credit is Capital," they are apt to be startled ; and they think
that such a doctrine is as much as to say that if one person lends
another his book, or his watch, or his horse : that makes two books,
or two watches, or two horses
THIRD AMBIGUITY 131
The whole difficulty arises from a want of knowledge of Mer-
cantile Law, and from not being aware that, most unfortanatelj,
the English words " Lend," " Loan,'* and " Borrow " are ambi-
gnons, and are used to denote two different operations of an
essentially distinct nature
It has been shown that there are two kinds of Bight — the
Eight of Property and the Right of Possession
And there are two distinct kinds of " Loan : " the one in which
the Right of Possession only is given for a limited time to the
" Possessor : " but the Right of Property remains in the " Lender : "
and the identical thing " lent " is returned to the " lender "
The other, in which the " Borrower " acquires the actual Right
of Property in the thing "lent:" and the "lender" acquires, in
exchange for it, the mere Right to demand an equivalent only for
the thing " lent," both in quantity and quality : but not the
identical thing "lent"
1 . The Commodatnm or r6 ^rjo-dficvoy
There are some things which can be lent, and the borrower can
enjoy their use, without acquiring the absolute Property in them :
and after having so enjoyed their use, he can restore the identical
things " lent " to their owner
Thus, if a person " lends " his horse : or a book : or his watch :
or his carriage : to his friend, his friend can ride the horse : or
read the book: or use the watch or thecarriage,without acquiring the
Property in them: and after he has enjoyed their use, he can restore
the identical horse, or book, or watch, or carriage to their owner
In such a case the "lender" only grants a certain limited
Right of Possession to the " borrower ": but he does not cede the
Eight of Property in them to the "Borrower." He retains in
himself the Right of Property and Possession in the things lent :
and can reclaim them at any time he pleases, without any notice to
the ** borrower." In such cases there is no Sale or Exchange : and
no new Property is created. In such cases the relation of Creditor
and Debtor does not arise between the parties. And there being no
Sale, or Exchange, there is no Economic phenomenon : and, conse-
quently, such transactipns do not enter into the Science of Economics
k2
132 THEORY OF CREDIT
Such a " Loan '' is termed in Roman Law a Commodatnm,
and in Greek Law to xp>7<''a/xcvov : because the use only of the
*Moan" is granted to the "borrower," and not the "Property "
in it
2. The " Mutunm : " Savciov, 8av€io-/xa. But there is another
kind of " Loan " in which the things " lent " cannot be enjoyed
unless they are consumed, destroyed, or alienated
Thus, if a peraon " borrows " such things as bread, coals, wine,
oil, or other things of a similar nature, he cannot enjoy their use
without consuming or destroying them : and they are lent and
borrowed with the knowledge and consent of both parties for the
purpose of being consumed and destroyed
Hence, from the very nature of the case, the " borrower " must
acquire the Right of Property in such things : and what he under-
takes to do, is to return not the identical things borrowed, but an
equivalent amount of other things of the same nature, and equal
quality and quantity to the things " lent "
So, when a person " borrows" Money, he cannot enjoy its use,
unless he is able to exchange it away for something else. Hence,
the person who " borrows " Money must, from the necessity of the
case, acquire the Property in it. And what he undertakes to do
is not to restore the identical Money "lent," but an equivalent
amount of Money at the stipulated time
So, if a person " borrows " a Postage Stamp, he can make no
use of it without affixing it to a letter : and so destroying it.
Hence, he must acquire the Property in it : and what he undertakes
to do is not to restore the identical stamp " lent," but another of
equal value
In all cases, therefore, of the " Loan " of such things as bread,
wine, oil, meat, coals, &c.; and also of Money, Postage Stamps, &c.:
the "lender" cedes the Property in the thing "lent" to the
" borrower : " and he acquires the Right to demand : and the
"Borrower" incurs the Personal Duty to render, an equivalent
amount of the things " lent : " but not the identical things
In all such cases a new Property is created : a Contract or aa
Obligation is created between the Lender and the Borrower : and
they stand in the relation of Creditor and Dpbtor
fmmmmf^^^a^^w^Bm^mmmim^ss^^a^^s^m^ m^ M .«
THEOPHILUS ON THE MUTUUM 133
All sach transactions are Sales or Exchanges : and are therefore
Economic Phenomena : and enter into the Science of Economics
A ^'Loan" of this nature is termed in Roman Law, a
Mutuum ; and in Greek Law, a Savciov or Sav€i<r/xa
To contract a loan of this nature is Mutuare, or Wcii^civ
The Roman lawyers said that Mutuum is derived from qtcod de
meo suumfit- because from being my Property it becomes yours.
Modern scholars, however, repudiate this etymology, liowever
plausible it may be. The Romans, it is well known, knew very
little of their own language. Modern scholars say that Mvtuum
is connected with mutarey to exchange ; as deciduus with decido :
and dwiduus with dimdo
But though the etymology may be fanciful, as are so many
others given by Roman writers, it exactly expresses the fact. In
the Loan of the Mutuum there is always an exchange of Properties.
In all cases of Mutuum or Sai^cioi', the relation of Creditor and
Debtor is created between the parties : and the Right which the
Creditor has to demand back an equivalent amount of the thing
lent is the Credit : or, as Ortolan says, the Price of the thing lent
The reader must therefore observe that every Loan of Money
whatever is a Mutuum ; and is a Sale or an Exchange
Theophilus on the Mutuum SaVciov or Sdv€i.<rfia and the Gommodatum:
TO ^rj(rd/i€vov
4. This distinction is so important that we may cite apassage
from the paraphrase of the Institutes of Justinian, by Theophilus,
one of the Professors of Law who were intrusted with the com-
pilation of the Institutes, because it is more full and distinct than
the passage in the Institutes :
" A real Obligation is contracted by an act, or by the manual
delivery of something counted out : and this includes the Mutuum
Bdveiov. A thing is a Mutuum where the Property in it passes to
the person who receives it ; but he is bound to restore to us not
the identical thing delivered, but another of the same Quality and
Quantity. I said so that the receiver becomes the proprietor of
it, that I might exclude the Commodatum, and the Depositum :
134 THEORY OF CREDIT
for in these latter the receiver acquires no Property. But he
must be bound to us to exclude the Donation : for he who receives
one acquires the Property, but is not bound to us. I said, he
must restore not the identical things lent : but others of similar
Quality and Quantity, that I might not deprive him of the use of
the Mutuum. P^or a person takes a Mutuum^ths^t he may use the
things for his own purposes, and return others instead of them.
For if he were obliged to give back the same things, it would be
useless to borrow them
" But all things are not taken as Mtifua : but only those which
consist in weight, number, and measure. In weight: as gold,
silver, lead, iron, wax, pitch, tin ; in measure : such as oil, wine,
and corn ; in number, such as Money ; and, in short, whatever we
deliver with this intent, in number, weight, or measure, so as to
bind the receiver to return to us, not the sam/i things, but others
of the same Nature and Quantity. Whence, also, it is called
Mutuum : because it is transferred by me to you with the intent
that it should become your Property {quod de meo tuumjit)
^^ But the real Obligation includes Commodatum : as if any one
were to ask me to lend him a book, and I lent it . . . But
the Commodatum diifers widely from the Mutuum. For the
Mutuum transfers the Property : but the Commodatum does not
transfer it : and, therefore, the borrower {Gommodatarius) is bound
to restore the very thing lent"
So it is said in the Digest xii., 1, 2, 2 — " But it is called giving
a Mutuum, because from being my Property it becomes yours
(quodde meo tuumfit) : and, therefore, if it does not become your
Property no Obligation is created "
But, on the contrary, with respect to the Commodatum, Digest
xiii., 6 : 8, 9 — ** We retain the Property and the Possession of the
i\i\ng\eii\j{rei commodates) .... No one by lending a thing
gives the Property in it to him who borrows it "
Thus the whole misconception has arisen from the English
words *• Lend," ** Loan," and " Borrow " being used to denote two
operations of essentially distinct natures
THIRD AMBIGUITY 135
The French language is equally faulty, the words louer^
ernprunter, and emprunt are equally applied to both kinds of Loan
But the distinction is clearly pointed out both in Bomau and
Greek Law : and the Latin and Greek languages have distinct
words for each operation
All commercial Loans are Muttta and not Commodata : every
"Loan" of Money is, in reality, a Sale or an Exchange, in which
a New Property is created, which is called a Credit or a Debt :
and when the Loan is repaid, it is another Exchange, by which the
new Property is extinguished
No one who had the simplest knowledge of the elementary
principles of Eoman and Greek Law, or of Mercantile Law, would
ever have committed the mistake of confounding the distinction
between the " Loan " of Money and the " Loan " of an ordinary
chattel ; such as a horse, or a book, or a watch
Suppose, for example, one peraon ** lends" to another £100
for one year, at five per cent, interest. What is the nature of the
transaction ? Every jurist has pointed out that it is in reality a
Sale, or an Exchange : in which the '* lender " cedes the Property
in the Money to the " borrower :" and acquires in exchange fur it
the Eight, or Property, to demand £105 at the end of the year :
and this Right is the Credit, or the Debt
And the Money is the Price of the Debt : and the Debt is the
price of the Money
Hence these things can only be the subject of a Mufuumy
which consist in pondere, numero, et mensiird : or which may be
estimated generically in weight, number, and measure. Such
things in Roman Law are termed Quantitates : because equal
quantities of bread, wine, oil, coals, &c., are as good as another
equal quantity of the same things of the same quality : or one
sum of 100 sovereigns is equal to another sum of 100 sovereigns :
or one postage stamp is always equal to another of the same
denomination
But, also, the Digest says mutna vice fwiguntur : one quantity
serves the same purpose as another quantity. From this expression
mediaeval jurists termed them Res Fungibihs : and, in modern
English Law^ they are termed Fungibles
136 THEORY OF CREDIT
In English Law the former kind of Loan, or the Commodatum,
is said to be returnable in specie : becaose the identical things lent
are returned : the latter kind of Loan is said to be returnable in
genere, because only things of the same nature are returned
Hence, therefore, though in all cases of a Loan, the same
Person always restores the thing to the lender : yet the two kinds
of Loan are of essentially distinct natures. It is much to be
regretted that the English language has not two separate words
to denote these distinct kinds of Loan : like the Latin and the
Greek : because the double meaning of lend, loan^ and borrow
has been the cause of great misconception among uninformed
writers as to the nature of Credit and Banking
On the Distinction betweefi a Debt and a Bailment
61. There is still one more very common and very im-
portant misconception to be cleared away to complete the
subject
There are three classes of Paper Documents which circulate
in commerce, and have some superficial resemblance ; that is,
they are both transferable by indorsement. Many writers, seeing
this superficial resemblance, consider them all to be of the same
nature, and include them under the title of Credit. This, how-
ever, is a profound error
These three classes of documents, though they have one point
in common, namely, that of being transferable by indorsement,
are yet fundamentally distinct in their nature and effects
These three species of Paper Documents are —
1. Bank Notes, Cheques, Bills of Exchange, Exchange Bills,
Navy Bill, Dividend Warrants, &c., and all other securities for
Money. All these are Instruments of Credit : and in law are
termed Valuable Securities. They are all Jura in personam :
and are Negotiable Instruments
2. Bills of Lading, Dock Warrants, and all other titles to
specific goods: they are termed in Law Documents of Title. They
are all Jura in re : and are Assignable Instruments
3. Drafts or orders for the payment of money
DEBT AND BAILMENT 137
In order to anderstand clearly the fandamental distinction
between these three classes of documents, we shall explain how
each of them arises
When a person ships goods on board a vessel, he receives from
the captain a paper document acknowledging the receipt of the goods :
and promising to deliyer them to a certain person, the consignee, or
to any one to whom the consignee may have transferred the document
by indorsement. This document is termed a Bill of Lading
The shipper pf the goods sends the Bill of Lading to the
consignee : who, directly he receives it, may transfer and assign
it to any one else by indorsement. And so it may be sold,
transferred and assigned by indorsement any number of times
like a Bill of Exchange. And any one to whom the instrument
is indorsed may go to the captain and demand the goods from
him, like the payee of a Bill of Exchange. And the captain is
bound to deliver the goods to the last indorsee
Similarly when goods are deposited in a dock warehouse, the
dock master gives a Paper Document, or Receipt for them, of a
similar nature to the Bill of Lading : which document is termed a
Dock Warrant. This may be sold and transferred any number of
times by indorsement like a Bill of Lading or a Bill of Exchange :
and whoever buys the Dock Warrant becomes the owner of the
goods described in it : and is entitled to demand and receive them
from the Dock Master
And there are other Paper Documents of a similar nature
All such goods in these cases are termed a Bailment. The
captain or the dock master is merely the Bailee or the Trustee of
the goods: and he acquires no Property in them. He merely
receives the Bight of Possession of them for a certain time, and
for a certain specific purpose. He has no right to convert them
to his own use : or to deal with them in any way, except the one
for which they were bailed to him : if he did so it would be a
robbery : and he would be punishable as a thief. In such cases
no new Property is created. The Property in the goods remains
in the shipper or depositor, and is transferred by him along with
the Bill of Lading or the Dock Warrant
138 THEORY OF CREDIT
From this it follows that Bills of Lading and Dock Warrants
are titles to specific goods, and to no others. They form one
property with the goods, and cannot be separated from them.
Whoever acquires the property in the Bill of Lading or the Dock
Warrant acquires the property in the specific goods described in
them* Thus these Paper Documents may be said to represent
goods : and they travel along with the goods. In every case
where a Bill of Lading or a Dock Warrant is offered for sale or
pledge, there must be some specific goods to which it is the title.
If there were not it would be a fraud, and an indictable offence.
Every person, therefore, who buys, or takes such an instrument in
pledge, knows that he has acquired a title to certain specific goods.
Buying the document is only a convenient way of buying or
receiving in pledge the goods themselves
In this case therefore there is no Exchange : and therefore no
act of commerce, or Economic phenomenon. These documents
have no Value in themselves, ue., they cannot be bought and sold
separately and independently of the goods themselves. No one
ever spoke of the value of a Bill of Lading or a Dock Warrant.
Such Documents are not Credit: because the owner does not
simply believe that he can get goods in exchange for them. But
he knows that he has acquired the property in certain specific
goods. These Paper Documents are, therefore, nothing in them-
selves : they are no addition to the general mass of Exchangeable
Quantities : they are no part of the Circulating Medium or
Currency : and they do not affect prices in any way
In a similar way when a person mortgages his land or house
he actually sells the land or house to the mortgagee. The
Mortgage Deed is the deed of sale : and is the Title to the specific
land or house : and cannot be separated from them
Hence all these documents. Bills of Lading, Dock Warrants,
Pawnbrokers' tickets. Bills of Sale, Mortgage Deeds, &c., belong to
the class of Jura in re : and are E^al Rights or Corporeal Property
But Bills of Exchange, Bank Notes, and all securities for
money arise out of transactions of a totally distinct natui*e. They
all arise out of the Sale or Exchange of the Mutuum. Paper
Credit always arises out of a Sale, and never out of a Bailment.
DEBT AND BAILMENT 139
The goods or money given in exchange for the Credit become the
actual property of the buyer : and the seller has nothing but a
Bight of action against the buyer. It is the absolute fundamental
requisite of all forms of Paper Credit, that they shall be absolutely
severed from any specific money. They are even forbidden to be
made payable out of any specific fund. They must be nothing
but pure abstract Rights against the person : and that is the
circumstance from which they derive their name of Credit :
because they are only bought on the faith, confidence and belief
that the Debtor can redeem them when due. Hence they are
independent exchangeable Economic Quantities. They are a mass
of exchangeable property just like any other : they do not represent
money, but they are exchangeable for money ; they are all part of
the Circulating Medium or Currency: and they all affect prices:
and produce all the effects of an equal amount of Money
Bills of Lading and Dock Warrants circulate in commerce
equally with Bank Notes and Bills of Exchange : but they circu-
late in a perfectly different way. Bills of Lading and Dock
Warrants always travel along with the goods they represent : and
if they are transferred any number of times it shows that the same
goods have been transferred that number of times. But Bank
Notes and' Bills of Exchange are exchanged against goods like
Money : and if they are transferred any number of times they
circulate an equal amount of goods to themselves at each transfer
Moreover, the law affecting the transfer of these documents is
different. All Rights to demand money follow the law of money ;
i,e,y when they once been passed away to an innocent purchaser
in commerce, he has acquired a good title to them : and the
original owner has lost h\%ju8 vindicaiidi
But Bills of Lading and Dock Warrants, being in fact identical
with the goods, follow the law of goods. If they have been stolen
and sold or pledged, the owner retains hi^jus vindkandi: and the
person who has bought them or taken them in pledge, however
honestly, must render them up to the true owner
Hence it will be seen that it is a vital Economical error to
confound the dibtinction between Bank Notes, Bills of Exchange,
and Bills of Lading or Dock Warrants
140 THEOBY OF CREDIT
8. The third class of Paper Docaments, termed Drafts or
orders for the payment of money ; also arise out of a Bailment,
and hold an intermediate position between Bills of Exchange or
Bank Notes and Bills of Lading or Dock Warrants
Public Institutions, including the State, Corporations, and
public bodies of various sorts, appoint persons called Treasurers to
hold their money in trust for them. When they give an order for
payment on their Treasurer, the instrument is termed a Draft, or
Order for the payment of money
The Treasurer is, of course, not a Debtor bound personally to
pay the Draft out of his own means : but merely a Trustee of the
money he holds on behalf of his employers : and only liable to pay
the Draft in so far as he has sufficient funds to meet it. The Draft,
therefore, is not a charge against the person of the Treasurer : but
a charge against the fund he holds
The Bills of Lading and DockWarrants are Bi ghts to specific goods
Bills or Notes are Bights against the person of the Debtor
Drafts are Bights to an undefined portion of the fund which
is held by the Treasurer as trustee for his employers : and involve
no personal liability
Moreover, as the fund under the charge of the Treasurer is
withdrawn from circulation, the Drafts drawn upon it can never be
in circulation as well as the money they relate to. Hence, such
Drafts do not increase the Circulating Medium : and they can never
exceed in quantity the fund they refer to
The Economic distinction between these three classes is important
Bills of Lading, Dock Warrants and Drafts can never exceed in
quantity the goods they represent, or the funds to which they are a
claim : bu t a merchant can issue bills or notes far exceeding the money
he may possess at any given time : because he is only bound to have
a sum of money to meet them on a particular day : even if he does
pay them in money. But as a matter of fact in modern commerce
bills and notes are very rarely indeed paid in money : but by other
methods which will be described in a succeding chapter. The
practical consequence of which is that the bills and notes in
circulation enormously exceed the amount of money they are
supposed to represent
MEANING OF WORDS 141
List of Words which^ in Classical Latin and Oreshy fnsan
Material Things^ hut which in Juridical Latin and Greek and in
Mercantile Law mean Abstract Rights and Duties
62. We have shown that among savage peoples and in
archaic jnrisprudence, Wealth is supposed to consist exclosivelj
of material possessions : and that there is very little idea of
Abstract Right
Bnt in the progress of civilisation and jurisprudence, the idea
of Abstract Right comes to predominate over material possessions
At first material possessions only are exchanged and acquire
value : but in the progress of civilisation Labor acquires value :
services of several kinds are wanted, demanded^ and paid for:
and words, which at first only meant material things, are extended
to include Labor and Services
In the further progress of civilisation and commerce, dealings
on Credit take place : and Creditors begin to perceive that they
can sell their Rights against their debtors : and soon begin to
insist upon their right to do so. Abstract Rights, therefore, came
to be saleable commodities, like material chattels
Moreover, other abstract Rights of various kinds came into
existence, and also became saleable commodities : and are as freely
sold as material chattels
Hence the meaning of many words which originally denoted
material things, and had to be extended so as to include Labor
and Services, is still further extended so as to include abstract
Rights of all kinds
At length, in the progress of jurisprudence, many words which
originally denoted nothing but material things completely lose
their original meaning, and are used exclusively to mean abstract
Rights and Duties, without reference to any material commodity
Thus, the most advanced jurists have shown that jurisprudence
deals exclusively with Rights: and has no reference to material things
So, we have shown that Economics treats exclusively of the
Exchanges of Rights, without any reference to material things :
and that in modem times the most colossal branches of commerce
consist entirely in the Exchanges of abstract Rights, which have
no relation to any material things
142 THEORY OF CREDIT
It will be very useful to the reader to have a list of those words
which origiaally meant material things, bat which in modem
Jurisprudence and in Mercantile Law denote exclusively abstract
Rights and Duties, which relate to the present subject : as it is
the want of this knowledge which has led to so much miscon-
ception and confusion in Economics
Property, as we have shown, comprehends the Property in
Material Things — the Property in Labor and Services — and the
Property in abstract Rights : and the whole Science of Economics
or Commerce consists in the Exchanges of these three kinds of
Property
The words to which we have alluded are —
1. Mancipiom. In early Latin Mancipium meant material
possessions, which could be grasped by the hand
In process of time, Mancipium came to mean Absolute
Ownership
Afterwards, Dominium was used to mean Absolute Ownership
exclusively : and never meant material things
Later still, Proprietas was also used to mean Absolute Owner-
ship, as synonymous with Dominium : and was never used to mean
material things
2. Pecunia. Originally Pecunia meant material Money only
But in Roman Jurisprudence Pecunia is expressly declared to
comprehend not only Money itself : but every other species of
property which can be valued in money : and includes Abstract
Rights
Similarly -^^imra in Greek originally meant material wealth :
but Aristotle defines it to mean anything whatever whose value
can be measured in money: thus it was extended to include
Labor or Services : and in Greek jurisprudence it is expressly
declared to include Abstract Rights
3. Bona. Originally Bona meant material goods and chattels :
but in Roman Jurisprudence, Bona means all property including
Abstract Rights
So irpayfiaray in Greek Jurisprudence includes Abstract Rights
MEANING OF WORDS H3
So, also, ayaOd in Greek Jurispradenoe means Goods and
Chattels : and Demosthenes includes Personal Credit under
iyaOd
4. Bes. Originally Bes meant Material Things
But, in Roman Jurisprndence, Res means anything whatever
to which a person has a Right : and comprehends material things :
Labor, Services, and Personal Chai*acter : and also, Abstract Rights
Material Things are termed Res Corporaks: Abstract Rights
are termed Res Incorporales
5. Merx. Originally Merx meant material goods which are
bought and sold
But, in Roman Jurisprudence, Merx means anything whatever
which can be bought and sold : and includes Abstract Rights
6. Oticos. It is sometimes supposed that oticos means a house
only
But, in the whole range of Greek Literature, from Homer to
Ammonuis, oticos means all a person's property or possessions of
every description : and includes Abstract Rights
In Attic Law oTicos is the technical term including a person's
whole subsistence or estate
7. Creditum. In classical Latin, Creditnm means the mate-
rial things which are lent ; whether Money or anything else^ and
the word is also used in this sense in the Pandects
In Roman jurisprudence, property which is lent to a person so
that it becomes his property, such as money, oil, wine, bread, &c.,
is termed a Mutuum
But in Roman Jurisprudence, Creditum is also used to mean
the Creditor's Right of action against his Debtor : and is thus
synonymous with Nomen
In modem Law, Commerce and Economics, Credit means the
Mercantile character which a person enjoys, so that he can pur-
chase goods, &c., without paying actual money for them : but by
giving his promise to pay money at a future time: and this
Credit is included under the term Wealth
A Credit is the Right of action which one person has against
another to compel him to pay or do something
8. Debitum. In classical Latin Debitum means the material
thing due
144 THEORY OP CREDIT
In Soman Jurisprudence Debitum is used as synonymous with
Obligatio : which is the Nexusy Oontract, or Bond of Law between
two persons, by which the one has the Right to demand and the
other has the Duty to pay or do something
But it also used to mean simply the Debtor's Duty to pay
In medieval Latin Debitnm is used to mean the Oreditor's
Right of action : and thus is synonymous with Nomen
In modern English Law and common usage, the word Debt is
used quite indiscriminately to mean the Creditor's Right of action
and the Debtor's Duty to pay
Thus in modern Law and common usage the words Credit and
Debt are used quite indiscriminately to mean the Creditor's Right
of action
And the word Debt is used quite indiscriminately to mean the
Creditor's Right of Action and the Debtor's Duty to pay
So ^xpio^ in Greek means originally the thing due
But in Demosthenes and the Basilica it is used to mean the
Creditor's Right of action : and it also means the Duty to pay
9. Depositum. In classical Latin and Roman Jurisprudence
Depositum means anything whatever which is placed in a person's
care and castody for the sole purpose of safe keeping : and of
which he is a mere Bailee or Trustee : and in which he acquires
no property : and of which he can make no use
But, in the technical language of modern Banking, a deposit
is a Banking Credit : it is the Right of action which a Banker
creates against himself to buy money, and bills of exchange, and
other securities : it is not a banker's asset, but a banker's liability:
and is synonymous with an Issue
Summary of Definitions
63. The reader will find it useful to have the results of the
preceding investigations condensed in a summary
1. Economics is the Science of Exchanges or of Commerce,
in its widest extent : and in all its forms and varieties : it is
sometimes called the Science of Wealth: or the Theory of
Value
SUMMARY OF DEFINITIONS 145
Economics may also be defined to he the Science which treats of
the Laws which govern the Relations of Exchaing^ahle Quantifies
2. Wealth is anything whatever wliich can be bought and
sold : or exchanged : or whose Value can he measured in money:
or which has Purchasing Power
3. A Quantity is anything which can be measured
An Economic Quantity is anything whatever whose Value can
be measured in Money
4. Wealth, Economic, or Exchangeable Quantities, are of
three distinct forms —
(fl) Material Things
{h) Personal Qualities; both in the foraiof Labor and Credit
{c) Abstract Eights
These three orders of Quantities can be exchanged in six
different ways
These six distinct kinds of Exchange constitute Commerce in
its widest extent : and in all its forms and varieties : they con-
stitute the Science of Pure or Analytical Economics
5. Property is not aThingbnt a Right : itincludesallthe Eights
which can be exercised over anything : it means Absolute Ownership
Hence, Wealth, Exchangeable or Economic Quantities, consist
exclusively of Exchangeable Eights
6. Jurisprudence is the Science of Eights
7. Economics is the Science which treats of the Exchanges
of Bights
Economic Quantities are of Three Species —
(a) Property, or Eights to things which have already come
into possession
(h) Property, or Eights to Labor or Services
{c) Property, or Eights to things which will only come
into possession at some future time
Eights to things which have already come into possession are
Inverse and Opposite to Eights to things which will only come
into possession at a ^ture time
Hence, if Eights, to things which have already come into
possession are termed Positive Economic Quantities ; Eights to
things which will only come into possession at some future time
may be termed Negative Economic Quantities
14G THEORY OF CREDIT
Rights to Material Things are termed Material or Corporeal
Property
Rights to Labor or Services are termed Immaterial Property
Rights to abstract Rights are termed Incorporeal Property
8. Every sum of Money is equivalent to a quantity of Mate-
rial things : or to a quantity of Labor or Services : or to the
Sum of the Present Values of an infinite series of Future
Payments
9. Rights are divided into Rights to specific things, termed
Jura in re : and Rights against persons, termed Jura in personam
10. Value. The Value of any Economic Quantity is any
other Economic Quantity for which it can be exchanged
11. Money is anything whatever which a Debtor can compel
his Creditor to accept in payment of a Debt : it is also called
Legal Tender
12. Money is a Right or Title to obtain some equivalent for
a product or service
13. Credit is a Right of action against a Person to compel
him to pay or do something
14. The Function of Credit is to bring into commerce the
Present Values of Future Profits
15. Barter is the exchange of Material products
16. Sale or Circulation is an Exchange, in which one or
both of the Quantities exchanged is Money or Credit
17. Exchange is where Quantities of a like nature are ex-
changed : either Commodities for Commodities : or Money or
Credit for Money or Credit
18. The Circulating Medium is the Medium by which Sales
or Circulation are eflFected : it comprehends Money and Credit in
all its forms, written and unwritten
19. Currency in Law is the attribute which affects some
things by which the property in them passes by delivery : in
strict Law it includes Money and all written securities for Money :
as a technical term in Economics, it is synonymous with Circu-
lating Medium : and includes Money and Credit in all its forms,
written and unwritten
20. The Channel of Circulation means all the Money and
Credit existing at any time
SUMMARY OF DEFINITIONS 147
21. Price is the quantity of Money or Credit which is given
to purchase anything
22. Interest is the Profit on a Loan of Money when paid at
the expiry of the loan
23. Discount is the Profit on a loan of money when paid at
the time of advance
24. Bate of Interest, or Discount, is the Profit made hy
Interest or Discount in some given time
25. Production is placing any Economic Quantity in the
market and ofPering it for sale
26. A Product is any Economic Quantity which is offered
for sale
27. There are Three different classes of Producers —
(a) Agricultural Producers
(b) Manufacturing Producers
(c) Commercial Producers
Commerce or Circulation is one form of Production
28. Payment means anything whatever which is taken in
exchange for anything else
29. Satisfaction is any thing whatever which is accepted as
the final close of a transaction
30. Capital is an Economic Quantity which is used so as to
produce a profit
Any Economic Quantity may be used as Capital
31. Capital may increase in two ways —
(a) By Increase of Quantity
(b) By Commerce, or Exchange
32. Capital is said to be Fixed when it i*emains in the
possession of the Capitalist, and he only derives a revenue from
its use
Capital is said to be Floating when the Capitalist parts with
it entirely in one operation : and the Value of it is restored to
him iu the Price of the product
33. There are Three Ambiguities in the Theory of Credit, or
Debt
(a) First Ambiguity, A Debt is not the Money owed
by the Debtor, but the abstract Personal Duty of
the Debtor to pay money
L2
148 THEORY OF CREDIT
(b) Second Ambiguity. The word Debt means both
the Creditor's Right of Action, and the Debtor's
Duty to Pay
; («) Third Ambiguity. The words **Loan," "Lend," and
"Borrow," have two distinct meanings : and denote
two distinct operations, in one of which Credit is
created : and in the other it is not : which are dis-
tinguished in Latin as Mutnum and Commodatum
84. A Loan of Money is a Sale or an Exchange in which
the property in the money passes to the " Borrower " : and in
exchange for it he gives a Bight of action to demand a snm of
money at a future time : which is the Price of the Money
35. A Bailment is where anything is delivered to the care of
a person for a definite purpose : as a Trustee : and he acquires no
property in it
36. Bank Notes and Bills of Exchange always arise out of
Bales either of Money or Goods. They are not Titles to any
specific Money : they are Rights of action against a person : they
are Jura in personam : and are termed Valuable Securities
Bills of Lading and Dock Warrants always arise out of a
Bailment. They are always Titles to specific goods : they are
Jura in re : and are termed Documents of Title
i
nf^mm^^^^^^^^^a
THEORY OP VALUE 149
CHAPTER II
THE THEORY OF VALUE
Preliminary Renuxrks
It has been shown in the preceding chapter that ancient writers
for 1300 years nnanimonsly held that Exchangeability is the sole
essence and principle of Wealth. And that whatever can be
bought and sold or exchanged : or whose value can be measured in
Money : is Wealth ; whatever its form or its nature may be
The ancients also showed that there are three distinct orders of
Quantities whose Value can be measured in Money : (1) Material
things : (2) Personal Qualities, both in the forms of Labor and
Credit : (3) Abstract Rights
After centuries of controversy, modern writers have at length
come to the same conclusion as the ancients
And as it is a matter of positive knowledge that there is
notBing beyond these three orders of Quantities whose value can
be measured in Money, the Science is now complete. Consequently,
having generalised all our Fundamental Concepts, so as to grasp
all these three orders of Quantities : by the Laws of Inductive
Logic, we are sure that our Concepts cannot be overthrown or
modified
It has also been shown that The Value of any Economic
Quantity, is any other Economic Quantity for which it can be
exchanged
Hence, the Theory of Value is the investigation of the Laivs
which govern the Relations of these Exchangeable Quantities
150 THEORY OF CREDIT
The complete Theory of Value comprehends :
1. The Definition of Value
2. The Origin, Cause, or Form of Value
8. The General Law of Value : or the General Equation of
Economics
On each of these three subjects there has been an immense
amount of controversy, which we have chiefly disposed of in the
Introduction, so that we have endeavoured to reduce it to a
minimum in the present chapter
DEFINITION OP VALUE 151
Section I
The Definition of Value
1. Value, ia its origiaal sense, is a Desire or AlTection of
the Mind, towards some object : it means Esteem, or Estimation
As Gloster says, in Lear^ '< In the division of the kingdom, it
appears not which of the Dukes he Values most "
So, Troilus, in Troilus and Cressida, says — "For what is
aught bnt as 'tis Valued "
So, Henry Esmond says — " There is some particular prize we
all of us Value : and that every man of spirit will venture his life
for"
So, J. B. Say says — '' Value is a Moral Quality "
Now, a person may Value a friend very highly : or he may
Value some object in his possession very highly : or he may desire
to obtain something which is in some one else's possession very
much. But, as Economics or Commerce is the Science of
Exchanges, such Value does not enter into Economics
To bring Value into Economics, a person must not only have
an estimate of some object or property of his own : but he must
have a Desire or Value for something which is in some one else's
possession, and be willing to give some of his own property in
exchange for it
One person, however, cannot acquire an object which another
person possesses, without giving him in exchange for it some object
which that other person Desires, Demands, and Values
Hence, Economic Vdm evidently requires the Ooncurrence oj
Two Minds
152 THEOKT OF CREDIT
If a person brought a cargo of tobacco to a nation of non-
smokers, it would have no Value among them : because no person
would Desire it
If a person brought a cargo of wine to a nation of tee-totallers:
it would have no Value : because no one would Desire it : and,
therefore, no one would buy it
It would be vain for farmers to breed cattle, or herds among
a nntion of vegetarians : because no one would desire them :
there would be no Demand for them: and, therefore, no one
would buy them
However, much a person may wish to sell his product, he
cannot do so unless some one else will buy it : and in that case it
would have no Economic Value. Hence, for an exchange to take
place, therc must be the reciprocal Desire or Demand of Two
peraons, each for the product of the other
When, however, two peraons each Desire or Demand to obtain
the product of the other ; and when they have agreed as to the
quantity of their own product which they will give in exchange to
acquire the product of the other, each product may be considered
the Measure of the Desire of its owner to obtain the product of
the other. The two products, therefore, Measure the Desire?
Demand, or Value of their respective owners to obtain the product
of the other : and when two persons have agreed upon the Quan-
tities of their products to be exchanged, the products are said to
be of Equal Value : each product is the Value or the Demand for
the other : and this is the only kind of Value with which Econo-
mics is concerned
Hence, in every phenomenon of Economic Value, or Exchange,
there are two Demands and two Quantities : and it is evident
that the true origin, or cause, of Value is Reciprocal Demand
Thus, let A and B be any two Economic Quantities which are
exchauged at any instant : then we may say —
A valet B
or, A is of the value of B
or, A = B
Then B is the Value of A in terms of B : and A is the Value
of B in terms of A
DEFINITION OF VALUE 153
Thus, Aristotle says, Nico. Eth. : B. iv., c. 3 —
" 17 afta AcycTai irpos ra cktos ayatfa
'' The term Value is tt««£^ in reference to external thing* '*
So it is said in Roman Law —
^' Res tautL Valet qaauti ?endi potest "
** The Value of a thing is what it can be sold far ^^
The Greek word for Value is d(Ca : which is derived from
aycD, one of whose meanings is to Weigh, or be of the
weight of
Thus, Demosthenes, speaking of some golden goblets, says^ —
** ayova-a €Kda"nj fivdv ** — " Each one weighing a mina "
And he says of the sword of Mardonius*— "*os Jyc irptaico<rtovf
SopciKovs" — Which weighed three hundred Darics^^
So Homer, Iliad, XXIII., 885, says—
*' #ca8 8c XiPifT airvpovj )9oos afiov, dvO€fJL6€yTa
OrJK is dytova ^cpa>v''
'* And he offered, too, as a prize, a new caldron, ornamented with
flowers. Worth an ox"
Hence a^ui means equality, weight for weight : as when two
quantities placed in a balance are of equal weight
So in Latin, cestimaiio means exactly the same as d^la : it
means the quantity of money (ces) given for anything
Thus Cicero^ speaks of " sestimatio f rumenti " — " The Value of
the corn to he furnished^''
So Caesar* speaks of " aestimatio possessionum et rerum " —
" The Value of their goods and chattels "
So Catullus says, 12, 11 —
" Quod me non movet sestimatione "
" Which does not affect me on account of its Value **
So Value was also expressed by ponderare, and pendeie, to
weigh
^Against Androtiotit 617, 21
* Against TimocrateSf 741, 7
» Fer. 2, 68
*BeU. Civil. 8, 1
154 THEORY OF CREDIT
So Morocco says, in the Merchant of Venice (II., 7)—
" Pause, there, Morocco,
And weigh thy Value with an even hand"
So in IV., 1, Portia warns Shylock —
'* If the scale do tnm
Bnt in the estimation of a hair " —
i,e.j by the weight of a hair
So Le Trosne says,^ that Value is a new Quality, which pro-
ducts acquire when men live in society —
" Products acquire, then, in the social state which arises
from the community of men among each other, a new Quality.
This new Quality is Value, which makes Products become
Wealth
Value consists in the Ratio of Exchange, which takes place
between such and such a product : between such a Quantity of
one product and such a Quantity of another product
Price is the expression of Value : it is not separate in Exchange :
each thing is reciprocally the price of the merchandise : in a sale
the price is in Money "
Hence it is clear that Value is a Ratio, or an Equation : like
Distance and an Equation, it necessarily requires two objects
The Value of any thing is always something external to itself.
Hence, a single object cannot have Economic Value. A single
object cannot be Equal or Distant. If an object is said to be
Equal or Distant, we must ask. Equal to what ? Distant from
what ? So, if any Quantity is said to have Value, we must ask,
Value in what ? And as it is absurd to speak of Absolute or
Intrinsic Equality, or Absolute or Intrinsic Distance : so it is
equally absurd to speak of Absolute, or Intrinsic Value
It is impossible to predicate that any Quantity has Value,
without at the same time implying that it can be exchanged
for something else : and, of course, every thing it can be
exchanged for is its Value in that commodity. Hence, any
Economic Quantity has as many Values as Quantities it can be
exchanged for : and if it can be exchanged for nothing, it has no
Value
Dt Vlntiret Sociale, ch, I., Sec. 4
EXAMPLES OF VALUE 155
Examples of Value
2. Any Economic Quantity may have Value in terms of any
other
Suppose that A, as above, is ten guineas : then B may be any
one of the other three species of Economic Quantities. It may be
a watch ; or so much corn ; or wine ; or clothes : or any other
material chattel
Or it may be so much Labor, Instruction, or Amusement
Or it may be a Bight of action, or a Debt, or the Funds, or a
Copyright, or Shares in a Commercial Company : or any other
abstract Right
Each of these species of property is of the value of ten guineas :
and, therefore, it follows that euoh of them is equal in value to the
others : because Things which are equal to the same thing are equal
to each other
The Value of Money in the pockets of the public is the
products, services, and Rights it can purchase. The Value of the
goods in the warehouses of merchants and traders is the Money in
the pockets of the public
The Value of an Incorporeal Bight is the thing promised which
may be demanded
The Value of a £5 Note is five sovereigns : the Value of a
postage stamp is the carriage of a letter : the Value of a Railway
Ticket is the journey : the Value of an order to see the play is
seeing the play : the Value of a promise to cut a man's hair is
the cutting his hair : the Value of an order for milk, bread, wine,
soup, coals, &c., is the milk, bread, &c.
If I want a loaf of bread which costs a shilling : what difference
does it make to me whether I have a shilling or the Promise of
the baker to give me a loaf. It is clear that in this case the
shilling and the Promise are exactly of the same Value to me
Suppose that the price of cutting one's hair is a shilling : what
diflTerence does it make to me whether I have a shilling, or the
Promise of the hairdresser to cut my hair ? In this case it is clear
that the Shilling and the Promise are of exactly equal value
to me
156 THEORY OF CREDIT
In short, in the case of every prodact and service, the Money
to purchase it with, and a Promise to render the prodact or service,
are of exactly eqoal value in each separate case
Each separate tradesman, of course, only promises to tender one
particular service or product : and, as the product or service is
not demandable from any one else, each Promise has only parti-
cular value : and as that person may become bankrupt or die, the
Promise has only precarious value
Now, what is Money, by the unanimous consent of Economists ?
It is nothing but a general Bight, or Title, to demand any of
these products or services at any time : and as there is always
some person who can render them if another cannot : Money has
General and Permanent Value : while each of these Promises has
only Particular and Precarious Value
Each of these separate Bights, then, is of exactly the same
nature as Money : but it is of an inferior degree. But they are,
each of them, Economic Qaantities, or Wealth, for the very same
reason that Money is. Is it not clear that if a person had his
pockets full of Promises by solvent persons to render him all the
products and services he might require, he would be exactly as
wealthy as if he had so much Money ? And he can always sell or
exchange any of these orders for orders for a different thing ; just
as he could material chattels. Hence we see the perfect justice of
the doctrine of all jurists that Bights are Wealth
On Negative Values
3. Value, then, being the Desire or Affection of the Mind
towards certain objects, may be of two forms : either the Desire
to acquire something, or the Desire to get rid of something
As these desires are Inverse and Opposite to each other, they
may be denoted by opposite signs : and if the Desire to obtain
something be termed Positive Value: the desire to get rid of
something may be termed Negative Value
Thus, if we consider a piece of land just in the fit state to
be cultivated and produce crops to be in the state 0; it may be
covered with primeval forest, with marshes and fens : with.
ON NEGATIVE VALUES 157
boulders or anjr obstrnctions to cultivation : it may require a
considerable sum of money to clear away all the obstructions and
place it in a fit state for cultivation : which we have denoted by
: the sum necessary to clear away these obstructions, and bring
it to the state 0, may be termed its Negative Value
So if it be intended to build a street of improved houses, the
ground when it is fit to be built upon may be denoted by : but
it may be covered with old bnildings, which it is necessary to
remove before it is fit to be built upon : the sum necessary to be
spent to remove these old buildings, and prepare it for the erection
of the new ones may be termed its Negative Value
So if the state of a person in health be denoted by : he may
fall into illness, and require the services of a physician to bring
him into a state of health. Now as the fees paid to the physician
are paid for removing an obstruction in health, they may be
termed a Negative Value
If all people were perfectly honest and never invaded the
Bights of other people, a very large portion of the fees paid to
advocates would be saved. If we consider the state of a person
in possession of his Eights to be : all the sums expended in
defending, maintaining, and recovering Rights might be saved :
and as these sums are spent in removing obstructions to the
enjoyment of Bights, they may be termed a Negative Value
If we consider persons in the enjoyment of perfect security
as to their persons and property as : and if people were perfectly
honest, and never attacked their neighbours' persons and property,
there would be no use for the police : hence all the sums spent on
the police, which are spent merely for the purpose of warding off
injuries to person and property, may be termed a Negative Value
If the reign of universal peace had come, and nations did not
attack one another, the enormous armaments by sea and land,
which weigh down the population and finances of all European
nations might be saved. So all the sums spent by European
nations on their fleets and armies are Negative Values
So many other instances of Negative Value might be adduced
Now it is evident that all the sums spent on Negative Values,
or on removing obstructions, are just so much substracted from
Positive Values, or the acquirement of enjoyments
158 THEORY OF CREDIT
We thus see what a gigantic obstrnction to progress and
Wealth are these Enropean armaments : and what an immense
advantage in the progress of wealth it is to America to be free
from them
It was the obsenration that there are two kinds of Yalne,
Positive Valne and Negative Value, to which we first drew
attention, which led Stanley Jevons, as he acknowledged, to
designate Political Economy by the somewhat fantastic title as
the *' Galcnlns of Pleasnre and Pain *'
There may he a Oeneral Rise or Fall of Prices, hvt not
of Values
4. Price is the Value of any Economic Quantity in Money
or Credit. Now, if Money or Credit be very greatly increased or
decreased in Quantity, the Prices of all other Economic Quantities
may rise or fall : but they will still preserve their relations
amongst themselves
If a loaf of bread and a pound of meat each cost a shilling : and
if, in consequence of a great increase in the Quantity of Money
and Credit they each rise to two shillings : or if, in consequence
of a great diminution in the Quantity of Money and Credit, they
each fall to sixpence : the loaf of bread is still of the Value of a
pound of meat
Hence there may be a general rise or a general fall of
Prices
But there can be no such thing as a general rise or a general
fall of Values. Eveiything can no more rise or fall with
respect to everything else, than, as Mill says, a dozen runners
can each outrun the rest : or a hundred trees can overtop each
other
To suppose that all things could rise relatively to each other,
would be to realise Pat's idea of society, where everyone is as good
as his neighbour, and a great deal better too
The opposite case of everything falling in value to everything
else, would be analogous to every one thinking himself inferior to
every one else : which, according to human nature, would be an
impossible case
NO FIXED VALUE 159
Nothing can have Fixed Value unk99 Bverything has Fixed
Value
6. As Value is the Ratio in which any two Quantities will
exchange, it is clear that the Valae of A in terms of B varies
directly as B : that is, that it increases or decreases according
to the greater or less Quantity of B that A can purchase. And
the Value of B in terms of A varies directly as A : that is, it
increases or decreases according as B can purchase more or less
of A
It is also clear that if from any cause whatever, the Value, or
Ratio, between A and B has changed ; the Value of both of them
has changed. It is manifestly as absurd to say that the Value of
A has changed with respect to B, but the Value of B has remained
the same with respect to A : as it would be to say that a railway
station has remained at the same distance from a train while the
train has increased its distance &om the station
Moreover, it is as absurd to say that a Quantity has changed its
own Value, or kept its own Value fixed : without stating the
Quantity with respect to which its Value has changed or remained
fixed : as it would be to say that an object had changed or preserved
its distance or Ratio fixed, without saying its distance from what :
or its Ratio to what
Hence, it is clear that nothing can have a Fixed or Invariable
Value : unless everything else is Fixed and Invariable in Value
as well. Because, though a Quantity may retain its Value un-
changed with respect to a certain number of Quantities : yet, if
its Value has changed with respect to any other Quantities : its
Value has changed
160 THEORY OF CREDIT
Section II
On the Origin, Source or Cause of Value
6. We now come to the second branch of our inquiry — What
is the Origin, Source, or Cause of Value ? Or, in the language
of Bacon — What is the Form of Value ? And whence does it
originate ?
Now, when we are to search for the Cause of Value, it is
necessary to understand what we are searching for. There are
three distinct orders of Quantities, each containing many varieties,
which all have value. We have to discover some Single cause
which is common to them all, and ascertain what that single
cause is by genuine induction
Bacon says^ — " But the Induction which is to be available for
the discovery and demonstration of sciences and arts must analyse
nature by proper rejections and exclusions : and then, after a
sufficient number of Negatives, come to a conclusion on the
Affirmative instances ''
And, also^ — " What the sciences stand in need of is a form of
Induction which shall analyse experience and take it to pieces, and
by a due process of exclusion and rejection, lead to an inevitable
conclusion "
The first step in this process of Induction is to make a com-
plete collection of all the different kinds of Quantities, of whatever
nature they may be, which have Value^— "For, whoever is
acquainted with Forms [«.e., Causes] embraces the unity of nature
in substances the most unlike. From the discovery of Forms
[Causes] results truth in theory and freedom in practice "
» Nov. Org., Bk. I., Aph. 105
^ Distributio Operis
» Nov. Org., Bk. II., Aph. 3
APHORISMS OF BACON 161
Bacon earnestly inculcates as the foundation of all true science a
careful collection of all kinds of instances in which the given nature is
foimd.^ — " The investigation of Forms proceeds thus: a nature [such
as Value] being given, we must first of all have a presentation before
the understanding of all known instances which agree in the same
nature though in substances the most unlike : and such collection must
be made in the manner of history without premature speculation"
Bacon then exemplifies his method by an investigation into
the form of heat. He gives tables of the diverse instances agreeing
in the nature of heat : also where it appears in different degrees.^
** The work and office of these tables, I call the presentation of
instances to the understanding, which presentation having been
made, Induction itself must be set to work : for the problem is
upon a review of the instances, all and each, to find such a nature
as is always present or absent with the given nature : and always
increases or decreases with it : and which is, as I have said, a
particular case of a more general nature
*' We must, therefore, make a complete solution and separation
of nature, not, indeed, by fire : but by the Mind, which is a kind
of divine fire. The first work, therefore, of true Induction (so far
as the discovery of causes) is the rejection or exclusion of the several
natures which are not found in some instances wheie the given
nature is present : and are found in some instances where the given
nature is absent : or are found to increase in some instances where
the given nature decreases : or to decrease where the given nature
increases. Then, indeed, after the rejection and exclusion has been
duly made, there will remain at the bottom, all light opinions vanish-
ing in smoke, a cause affirmative, solid, and true and well defined "
An indispensable part of Induction is the rejection of erroneous
causes^ — ** I must now give an example of the exclusion and re-
jection of natures, which, by the table of presentations, are found
not to belong to the Form (of Value), observing, in the meantime,
not only each table suffices for the rejection of any natuie, but
even any one of the particular instances contained in any of the
tables. For it is manifest from what has been said, that any one
contradictory instance overthrows a conjecture as to the cause "
•iVor. Oi-g., Bk. II., Ajjh. 11
2JVb«. Ch-ff., Bk. 11., Apk. 16
^Nov. Org., Bk. II., ^;y/i. 18
M
162 THEORY OF CREDIT
Investigation of the Form or Cause of Value
7. Bacon has exemplified his process of Induction by
investigating the Form or Cause of Heat: oar present task is to
investigate the Form or Cause of Vahie
Following the example of the mighty master we must begin
by making a complete collection of all the instances of Yalue.
That is, we mast enumerate all the different kinds of Quantities,
with all their varieties, which have Value
These are —
I. Corporeal or Material Quantities: under this species are
comprehended the following varieties —
Lands : Houses : Trees : Cattle : Flocks and herds of all
sorts : Corn and all other fruits of the earth : Furniture : Clothes :
Money : Minerals of all sorts : Money : Jewelry of all sorts :
Pearls : Manufactured articles of all sorts : Fish
II. Immaterial Quantities: comprehending Labor of all
sorts : agricultural : artisan : professional : scientific : literary
III. Incorporeal Quantities : comprehending Rights of
action : Credits or Debts : the Funds : Copyrights : Patents :
Shares in commercial companies : the Goodwill of a business : a
professional Practice : Tolls : Ferries : Tithes : Advowsons :
Ground rents : Shootings : Fishings : Market Rights
We must now investigate the Cause of Value of all these different
kinds of Quantities, and in each one separately. We must first by
a due and systematic course of Rejections and Exclusions, eliminate
all accidental and intrusive ideas which may in some cases be asso-
ciated with Value, and in others not : and after completing this
course of rejection and exclusion, we must end by an Affirmative :
and discover that Single General Cause, which is common to all
these different classes of Quantities : which being present, Value is
present: which being absent, Value is absent: which when it
increases. Value increases : which, when it decreases, Value decreases
Materiality is not Necessary to Value
8. Now in examining the three classes of Quantities which
all have Value, we observe that the whole class of Immaterial
Quantities and the whole class of Incorporeal Quantities have
Value : but have no Materiality
rsB
LABOR NOT TUB CAUSE OF VALUE 163
Hence, it is evident that Materiality is not Necessary to
Value : it is only in some cases the Accident of Value
Durability is not Necessary to Value
9. We also observe that some things which have Value Jast
for ever, like the Land : The Funds : Shares in Commercial
Companies : precious stones
Other things may last a very long time, such as houses, watches,
pictures. Other things have a much less degree of durability,
such as clothes, animals, &c. Others have a very short degree of
durability, such as food, flowers, &c.
But Labor, which in many cases has very high Value, perishes
in the instant of its production : and, therefore, has no durability
or permanence at all
Thus, Quantities which have Value, have all degrees of per-
manence or durability. Now, among Bacon's Prerogative instances
he mentions, ultimity, or Limit : and says^ — " Nor should ex-
tremes in the lowest degree be less noticed than instances in the
highest degree "
This is the doctrine of the Law of Contmuity, which
says —
" That which is true up to the limit is true at the limit "
From these principles it follows that things which have the
lowest degree of permanence or durability, which is 0, are to be
included in Economics, as well as those which have the highest
degree
Hence, it is seen that Permanence, or Durability, is not
Necessary to Value : it is only the Accident of Value
Error of the Doctrine that Labor is the Cause of Value
10. Having shown that Materiality and Permanence are in
no way necessary to Value, but are only its accidents in some
cases : we have now to discover the Cause of Value
A doctrine which has obtained great hold over English
Economics, is that Labor is the Cause of Value
> Mv. Org., Bk. II., Aph, 34
M2
164 THEORY OF CREDIT
Now, if we simply refer to the Table of Instances given above,
it will Ire seen at once that there are multitudes of instances of
Value in which there is no Labor at all : and this at once shows
that Labor is in no way essential to Valne, but is only accidentally
associated with it in some ca£es
Nevertheless this fatal doctrine has obtained such a firm hold,
and has had such a baleful influence, over English Economics:
and has so especially prevented the true apprehension of the
principles of Credit, that we must give a more elaborate refutation
of it
The doctrine that Labor is the Cause of all Value, which is
entii'ely peculiar to English Economics, originated as far as we
are aware, with Locke. As this passage is but very little known,
we shall make room for it, though rather long
After alleging that the foundation of the right of appropriat-
ing portions. of the earth and its products by private persons
originated in the Labor they bestowed on them, he says* —
'* Nor is it so strange as, perhaps, it might appear, that the
property of Labor should overbalance the community of Land :
for it is Labor, indped, that puts the differmce of Value upon
everything : and let any one consider what the difference is between
an acre of land planted with tobacco and sugar, sown with wheat
and barley : and an acre of the same land lying in common,
without any husbandry upon it, and he will find that the improve-
ment of Labor makes the far greater part of the Value. I think
it will lie but a very modest computation to say, that of the pro-
ducts of the earth useful to the life of man, nine-tenths are the
effects of Labor: nay, if we will rightly estimate things, as they
come to our use, and cast up the several expenses about thera,
what in them is purely owing to nature and what to Labor, we
shall find that in most of them ninety-nine hundredths ai*e wholly
to be put on the accx)unt of Labor
** There cannot ba a clearer demonstration of anything, than
several nations of the Americans are aware of this, who are rich in
land, and poor in all the comforts of life : whom nature having
furnished as liberally as any other people with the materials of
plenty : i.e., a fruitful soil, apt to produce in abundance whab
* Essay on Ciiil Gnrernment
LOCKE ON VALUE 165
might serve for food, raimeDt and delight : yet, for want of im-
proving it by Labor, have not oue-huudreth part of the conve-
niences we enjoy : and a being of a large and fruitful territory
there feeds, lodges, and is clad worse than a day-lal)orer in
England.
'* To make this a little clearer, let us but trace some of the
ordinary provisions of life through their sevei'al progresses, before
they come to our use, and see how much of their Value they
receive from human industry. Bread, wine, and cloth are things
of daily use, and great plenty : yet, notwithstanding, acorns, water,
and leaves, or clothing or skins, must be our bread, drink and
clothing, did not Labor furnish us with these more useful com-
modities : for whatever bread is more than acorns, wine than
water, and cloth or silk than leaves, skins, or moss, that is wholly
owing to Labor and Industry : the one of these being the food and
raiment which unassisted nature furnishes us with : the other,
provisions which our industry and pains prepare for us : which
how much they exceed the other in value, when any one hath
computed, he will then see how much Labor makes far the greater
part of the Value of things we enjoy in this world : and the ground
which produces the materials is scarce to be reckoned on, as any,
or at most, a very small part of it : so little, that even among us,
land that is left wholly to nature, that hath no improvement of
pasturage, tillage, or planting, is called, as indeed it is, waste :
and we shall find the benefit of it amount to little more than
nothing
" An acre of land that beara here twenty bushels of wheat, and
another in America, which with the same husbandry would do the
like, are without doubt of the same natural intrinsic value : but
yet, the benefit mankind receives from the one in a year is worth
d£5, and from the other probably worth a penny, if all the profit
an Indian received from it were to be valued and sold here : at
least, I may traly say, not one thousandth. It is Labor, then,
which puts the greatest part of the Value on land, without which
it would scarcely be worth anything : it is to that we owe the
greatest part of all its useful products : for all that the straw, bran,
bread of that acre of wheat is more worth than the product of as
good land which lies waste, is all the effect of Labor : for it is not
166 THKORY OF CREDIT
barely the plonghman's pains, the reaper's and the thresher's toils,
and the baker*s sweat, is to be counted in the bread we eat : the
Labor of these broke the oxen, who digged and wrought the iron
and stones, who felled and framed the timber employed about the
plough, mill, oven, or any other utensils, which are a vast number,
requisite to this com, from its being seed to be sown to its being
made bread, must all be charged on the account of Labor, and
received as an eflTect of that : nature and the earth furnished only
the almost worthless materials as in themselves. It would be a
strange catalogue of things that industry provided and made use
of about every loaf of bread before it came into our use, if we could
trace them : iron, wood, leather bark, timber, stone, brick, coals,
lime, cloth, dyeing, drugs, pitch, tar, masts, ropes, and the mate-
rials made use of in the ship that brought any of the commodities
used by any of the workmen to any part of the work : all which it
would be imposible, at least too long, to reckon up "
We have given this extract at length, because it is probably
the most elaborate Economical analysis of price of its time : and
so far as we are aware, was the first assertion that Value is due to
human Labor. The doctrine that all Wealth is the produce of
Land and Labor became very common among the early thiukers
on Economics, from their ignorance of Jurisprudence and practical
business
The Economists restricted the term Wealth to the material
products of the earth which are brought into commerce and
exchanged. Hence, according to this doctrine. Labor and Mate-
riality were indispensably associated with Value, but they were
not the Cause of Value ; because, unless these material products
were exchanged, they had no Value : hence the Economists made
Exchangeability or Demand the Cause of Value
Adam Smith begins his work by designating Wealth as the
"annual produce of land and Labor:" but as he afterwards
enumerates the natural and acquired abilities of the people as
Wealth : and he also classes Bank Notes and Bills of Exchange as
CiFculatiug Capital : he is quite self-contradictory : and he after-
wards admits that Excbangeabilty is the real essence of Value
LABOR AND VALUE 167
Ricardo's work is a treatise on Value : but he begins by
restricting his inquiry to things which are the produce of
human labor : and then, he says, that Labor is the foundation
of all Value. But, such a mode of reasoning is evidently
inadmissible
McCuUoch, who is a mere copyist of Ricardo, also, in one
place, strenuously maintains that Labor is the Cause of all Value.
He says^ — " Nature is not niggard nor parsimonious. Her rude
products, powers and capacities are all offered gratuitously to man.
She neither demands nor receives an equivalent for her favora.
An object which may be appropriated or adapted to our use
without any voluntary labor on our part may be of the highest
utility, but as it is the free gift of nature, it is quite impossible
that it can have the slightest value "
Also — ** In its natural state, matter is very rarely possessed
of any immediate or direct utility, and is always destitute of
Value. It is only through the labor expended in its appropriation
and in fitting and preparing it for being used, that matter acquires
Exchangeable Value and becomes Wealth "
We shall afterwards show the absurd consequences of this
doctrine : and show McCulloch's self contradictions
So, also, Carey, the American Economist, was infected with this
doctrine, and says — " Labor is the sole cause of all Value "
Now, it is impossible to stir a step in this subject until this
contradiction is cleared up : and we determine whether Labor or
Exchangeability, i.e,, Demand, is the Cause of Value
Examination of the Doctrine that Labor is the Cause
of Value
11. We have now to apply the principles of the Baconian
Induction to investigate the doctrine that Labor is the sole Cause
or Form of Value
^Introduction to Adam Smith
168 THEORY OF CHEDIT
We may lay down this Lemma —
If Labor is the sole Cause of Value, then whatsoever thing
Labor has been bestowed upon must have Value
For if there be two things produced by the same amount of
Labor, and the one has Value, and the other not : then there
must be some other cause of Value besides Labor: which is
contrary to the hypothesis
We will now examine some of the necessary consequences of
the doctrine that Labor is the Cause of all Value
I. All Differences or Variations in Value must be due to
Differences or Variations in Labor
This, which is Locke's doctrine, is contrary to all experience :
because there are many material things upon which no Labor was
ever bestowed, which yet have very great Value : and also very
great differences of Value
The space of ground upon which a City is built has enormous
Value : but this space of ground is in no way the product of Labor
Land near the Bank of England has often sold at the rate of
£2,000,000 an acre : quite exclusive of any buildings on it : how
is this land the product of Labor ?
As we recede from the centre the Value of land rapidly
diminishes : at the present time the Value of Land at Charing
Cross, is said to be £600,000 an acre : but in the suburbs of
Loiidon it i^ far less
.^Moreover, land in the same locality has very different Values.
; A frontage' in a main thoroughfare like Cheapside, Fleet Street,
Cornhill, Regent Street, is of much greater Value than an equal
space of ground in a back street
How are these differences of Value due to differences of Labor,
when, as we have seen, there never was any Labor at all bestowed
on the Land ?
Within the last century immense cities have sprung up in the
desert. A hundred years ago the space of ground on which
Melbourne, Sydney, Adelaide, Chicago, and countless other cities
have been built, was absolutely worthless : it is now of enormous
Value : how is its value due to Labor ?
LABOR AND VALUE 169
If the aug^inented Value of land is due to increased Labor
bestowed upon it, a diminution of the Value of Land must be due
to Labor subtracted from it. But how is this possible ?
As the tide of fashion, population, and wealth flows towards a
locality, the ground rapidly rises in Value : whereas when a
locality is deserted by wealth and population the Value of Land
rapidly diminishes. How are these changes in the Value of
Land due to variations in Labor ; when, as we have seen, the
Value of these spaces of ground is not the result of Labor at all ?
The ground in the centre of London, Paris, Berlin, Vienna,
New York, and countless other cities, has enormous Value. There
are numerous other places now desolate and lonely which were
once the site of great cities
Memphis, Babylon, Nineveh were once great cities : when the
chariots and the horsemen were pouring forth in multitudes from
the hundred-gated Thebes, the land in it had assuredly very great
Value. So with numberless other places. Where is their Value
now ? Yet the ground remains exactly the same as ever it was.
Is this diminution in Value due to the subtraction of Labor ? If
London, Paris, Berlin, Vienna, should ever come to be as Nineveh,
Babylon, and Memphis are to-day, where would the Value of the
land be ? When the future Belzoni or Layard comes from New
Zealand to sketch the ruins of St. PauFs from a broken arch of
London Bridge, will the ground near what was once the Koyal
Exchange sell for £70 the square foot ?
When a fair is held near a town persons pay a
for leave to erect booths and tents on the common,
these times the land acquires Value. At other times
pay nothing : therefore the simple space of ground has Value
one time : and not at others. How can the Value of the land be
due to Labor, when it remains exactly as it was ?
McCulloch*s doctrine that no natural product has Value before
Labor has been bestowed upon it : and that it is the Labor of
appropriating it which gives it Value, is refuted by the plainest
experience
170 THEORY OF CREDIT
Suppose a person found a fine diamond weighing 400 carats,
would it have no Value ? And is it the Labor of appropriating
it which gives it its Value ?
Suppose another person finds a nugget of gold weighing 400
ounces, has it no Value ? And is it the Labor of picking it up
which gives it its Value ?
The proprietor of a coal mine or a marble quarry demands
and receives a price for the coal or the marble as it exists in the
mine or the quarry before a human being has touched it
The Government founds a new Colony, and takes possession
of the Land : it is quite common to demand a price or rent for
the land which no person ever touched. How is its Value due to
Labor ?
In the Midland Counties of England there are many oak trees
which would sell for £60 or £100, as they stand upon the
ground. They were perhaps self-sown : no person perhaps ever
bestowed so much Labor upon them as to sow the acorn from
which they grew. How is the Value of such oak trees due to Labor ?
But the very same oak trees in the centre of a forest in an
uninhabited country would have no Value at all. How are these
dififerences of Value due to Labor ?
It is said that in 1810 an oak tree was cut down at Gelenas in
Monmouthshire, whose bark sold for £240, and the wood for
£670 : was this Value due to Labor ?
Near these oak trees there may perhaps be growing other
trees — beeches, elms, ashea— of the same size. It is well knowa
that these trees do not have the same Value as oaks. Are these
differences in the Value of the different trees due to Labor ?
It is the first resource of gentlemen when embarrassed to sell
the timber on their estates. These trees often realize many
thousands of pounds. Is their Value due to Labor ?
There are again cattle, herds, and flocks of all sorts. They
increase and multiply by the agency of nature. How is their
Value due to Labor ?
Some time ago a large whale was stranded on the Firth of
Forth : it sold as it lay on the beach for £70 ; no human being
touched it : how was its Value due to Labor ?
LABOR AND VALUE 171
Mr. Bnckland says — " When examining the cast-off skins of
the snakes at the Zoological Gardens, we observed some white-
looking substance in a box. This is the drjecfa of the snakes.
It is a perfectly white substance, looking very like plaster of Paris,
and is composed of nearly pure uric acid. It is bought by a
doctor (I imagine a chemist) for the high price of nine shilliugs
a pound.*' Is the value of the excreta of the snakes due to human
Labor ?
Some years ago when it was the fashion for European ladies
to pile huge masses of hair, termed Chignons, upon their heads,
in imitation of their swarthy sisters of Central Africa, it was not
uncommon for a girl's hair to sell for £5, £10, £20, and even
sometimes for so high a sum as £50. Was the Value of the
girl's hair due to Labor ?
It is stated in a French paper that at Merlans, in the
department of the Lower Pyrenees, there is a regular market for
girls' hair, held every second Friday, which is attended by
hundreds of hairdressers. Ordinary hair does not go for much —
three to twenty francs a head. But for pure white hair there is
an immense demand, and it sells from £15 to £20 an ounce.
There is no market for ordinary grey hair. Now, is the value of
this pure white hair due to human Labor? And is the difference
in price between ordinary hair and pure white hair due to
differences in Labor ?
II. If Labor be the sole cause of Value, then all things
produced by the same Quantity of Labor must be of equal Value
But this doctrine is contrary to all experience
If it were true a diamond and the rubbish it is found in
ought to be of the same Value ! So a pearl and its shell ought
to be of equal Value. If a lump of gold and a lump of clay were
obtained by the same Quantity of Labor they ought to have the
same Value
If a sportsman were to shoot a pheasant with one barrel and
a crow with the other, they ought to be of the same Value. Or
if a fisherman were to catch a salmon and a dogfish in the same
net, they ought to be of the same Value
172 THBORY OF CREDIT
And Bimilar cases might be multiplied to any extent
Here we have products obtained by exactly the same Quantity
of Labor : some of which have Value, and others have no Value :
which decisively proves that Labor cannot be the sole Cause of
Value
II L If Labor is the sole Cause of Value the Value must be
Proportional to the Labor
But this doctrine is contrary to the most manifest experience
Suppose that a gold digger by good luck finds a nugget of
gold lying on the surface of the ground : another digger works
for six months and finds an exactly similar one : another works
for a year and finds an exactly similar one : and so on. Then,
according to this doctrine the nugget last found ought to be of
immensely greater Value than the nugget fii-st found. But it is
notorious that such a doctrine is wholly fallacious. The nuggets
would have exactly the same Value, notwithstanding that they
were found with greatly different Quantities of Labor
So when different quantities of wheat mingle in the same
market, brought from all different countries of the world, their
general value is determined solely by the Law of Supply and
Demand : but wheat of a superior quality bears a higher price
than wheat of an inferior quality, witliout tlie slightest reference
to cost of production. We saw in a paper that some wheat fronci
Manitoba was brought into the Liverpool market, and it was at
once priced '6d, per hundred pounds higher than the best
Californian wheat. This was due simply to its superior quality,
and had nothing to do with cost of production
And many other cases of a similar nature might be cited
IV. If Labor be the sole Cause of ValuCy a thing once
produced by Labor must always have Value, and the same Value
But this is notoriously contrary to experience : because it is
notorious that a thing may have Value in one place and not iu
another : and at one time and not at another : as the author of
the Eryxias very clearly showed
LABOR AND VALUE 173
A bag of 80vereip:n8 has great Value in London : but
take them among, the Eskimos and where would their Value
be?
A professor of Greek, Latin or Mathematics, may find his
acquirements of great Value in the Universities, where there is a
demand for instruction : but of what Value would they be to
him among the Patagonians ?
A great Lawyer fiuds his knowledge and his skill of great
Value in the Royal Couits of Justice, but of what Value would
they be among the Hottentots ? Even in London itself, if a
man labors very hard to acquire professional knowledge, and no
one employs him, where is the Value of his Labor ? If a man
had all the medical knowledge in the world, from Hippocrates
and Galen to Copland, and no one was ill, what Value would it
be of to him ? If an author were to publish the most learned
and laborious works in the world, and no one would buy them,
what Value would they be of to him ?
To say that Labor is the Cause of Value, is to say that an
isolated thing can have Value : whereas Value is always relative,
and can only aiise in society. But if a man labors ever so hard
and no one will buy his products, he is no better off in London
than in the Sahara •
If any one were to set up a manufactory of watches, or
reclaim land, and grow fine fields of wheat in the centre of
Australia, where there i« no demand for the watches or the corn,
where would their Value be ?
Moreover, if Labor be the sole Cause of Value, if a thing is
once produced its Value could never vary : which is Ricardo's
express doctrine. But this is contmry to all experience. Because
after things have been produced, and all Labor upon them has
been ended, they constantly vary in their Value from day to day ;
from month to month : and from year to year
Thus, pictures by one master constantly rise in Value : and pic-
tures by another master diminish in Value : long after the hand
which has produced them lies cold in the grave. The pictures
themselves remain the same : it is the taste of the public which
varies
174 THEORY OF CREDIT
Ricardo maintains that the same Labor in manufactures
always produces the same Value
In the reign of George III. there was a very widespread
fashion to wear steel shoe buckles : this manufacture employed a
very large number of i)ersons. All of a sudden tliese steel buckles
went out of fashion : the demand totally ceased : and the people
employed in making them were thrown into the greatest distress.
But according to Ricardo, the buckles were of exactly the same
Value when there was a demand for them, and when there was
no demand for them !
Some years ago the fashion of ladies wearing straw bonnets
suddenly went out ; and the manufacturers of them at Luton,
Dunstable, &c., were thrown into great distress. But according
to Ricardo, the Value of the straw bonnets was exactly the same,
whether there was a demand for them or not
According to Ricardo, if the warehouses of Manchester were
groaning with goods, the produce of Labor, they would be of
exactly the same Value, whether there was a demand for them or
not. We doubt whether the manutacturers of Manchester would
acquiesce in this doctrine
Now with respect to the second order of Economic Quantities,
namely. Immaterial Property, which comprehends all species of
Labor, one simple question will suffice —
If Labor u the sols Cause of Value, what is the Cause of
the Value of Labor ?
Laborers of all kinds know only too feelingly the bitter
mockery of the doctrine that Labor is the Cause of Value, when
often and often it happens that thousands and thousands of them
are only too willing to sell their Labor, and there is no one to buy it
With respect to the third species of Economic Quantities,
namely Incorporeal Property, or abstract Rights, there are some
kinds which are associated with Labor : such as Copyrights,
Patents, and the Goodwill of a business
But the same remark applies to them as to material objects
with which Labor is associated : that Labor cannot be the Cause
of their Value
LABOR AND VALUE 175
If a person bestows an enormous quantity of Labor in
publishing a work, the Law of course may give him the Copy-
right : but if no one will buy the work, where is its Value ?
So also of Patents : an inventor may bestow enormous Labor
in perfecting the machine : but if no one will buy the machines
made, where is the Value of the patent ?
No persons know more feelingly than authors and inventors
that Labor is in no way necessarily the Cause of Value
But there are vast amounts of Incorporeal Property which
have Value which are not associated with Labor at all
Thus a person who held a large amount of the Funds would
be a wealthy man : and the Funds have Value. But w^here is the
Labor bestowed on them ?
Mill himself allows that a promise to pay by a solvent
merchant or banker is of exactly the same value as the gold
itself: which of course it is, because the gold is the Value of the
promise. But how is the Value of the promise due to Labor ?
and the whole mass of circulating Credits or Debts are of exactly
the same Value as an equal quantity of gold. How is the Value
of this mass of circulating Credit due to Labor ? The quantity
of this mass of Credit in this country is colossal : it far exceeds
any other kind of single property in the country except the land
Thus we see the utter fallacy of the doctrine that Labor is
necessary to Value : and that all wealth is the produce of land,
labor, and capital
Remits of (he Preceding Inquiry •
12. We may now summarise the results of the preceding
investigation. These are —
1. That there are vast quantities of property, both Corporeal
and Incorporeal, which have Value, upon which no Labor was
ever bestowed
2. That quantities produced by Labor, both Corporeal and
Incorporeal, may have no Value
3. That the same quantity of Labor may produqe products,
some of which have Value, and others no Value
176 THEORY OF CREDIT
4. Tliat quantities produced by varying quantities of Labor
may have the same Value
6. That things produced by Labor may have Value in some
places and not in otiiers : and at some times and not at others
6. That things produced by less Labor may have greater
Value than things produced by more Labor
From these indisputable propositions, the result of practical
experience, the undeniable inference is that Labor is not in any
way whatever the Cause or Form of Value : or even necessary
to Value : and in fact in this great commercial country the
enormously greater amount of Valuable Property is not the result
of Labor at all
Now by the Laws of Inductive Philosophy if we could find a
single case of Value which was not the result of Labor, that
single instance would alone be sufficient to overthrow the doctrine
that Labor is the sole Cause of Value. But instead of one
instance there are multitudes. In fact the enormously greater
portion of Valuable Property is not associated with Labor at all
In short there never was any doctrine in science which has
received such a crushing and overwhelming overthrow as that
Labor is the Cause of Value : and hence that system of Economics
which founds its idea of Wealth and Value on Labor is utterly
fallacious
The pertinacity with which some writers still maintain that
Labor is the Cause of all Value contrary to the evidence of the
most glaring facts is a strong and striking instance of Bacon's
Aphorism ^
**The human understanding when it has once adopted an
opinion (either as being the received opinion or as being agreeable
to itself) draws all things else to support and agree with it. And
though there be a greater number and weight of instances to be
found on the other side, yet these it either neglects or despises, or
else by some distinction sets aside and rejects : in order that by
this great and pernicious pre-determi nation the authority of its
former conclusions may remain inviolate ....
» Nm'. Org. Bk. I., Aph. 46
DEMAND THE CAUSE OF VALUE 177
**But with far more subtlety does this mischief insinuate
itself into philosophy and the sciences : in which the first
conclusion colors and brings into conformity with itself all that
come after, though far sounder andbetter. Besides, independently
of that delight and vanity which I have described, it is the
peculiar and perpetual error of the human intellect to be more
moved and excited by affirmations than by negatives : whereas it
ought properly to hold itself indifferently disposed towards both
alike. Indeed, in the establishment of any true axiom the
Negative instance is the more forcible of the two "
Demand is the Sole Cause of Value
13. It has now been shown that Materiality and Durability
are in no way necessary to Value ; but are only in some cases
the accidents of Value : it has also been shown that Labor is not
the Cause of Value ; but is only in some cases the accident of
Value
But each of the Quantities in the Table of Instances may be
bought and sold, or their Value may be measured in Money : each
of them possesses the attribute of Exchangeability : and that is
the sole attribute which is common to all classes of the Quantities,
and to each separate Quantity in each class. Hence as the
ancients unanimously held for 1,300 years, Exchangeability is the
sole essence and principle of Wealth
Thus by strictly following the precepts of Bacon, by strictly
rejecting and excluding all accidental and intrusive ideas we have
obtained an affirmative issue
Now what is necessary in order that any Quantity may be
Exchangeable ? Evidently that some one else should Demand
it. If I offer something for sale, what is necessary that it should
be sold ? Simply that some one else should Desire or Demand it.
It is therefore manifest that Demand is the sole Cause of Value
The author of the Eryxias over and over again points out that
Demand is the sole cause which constitutes anything Wealth ;
that anything, whatever its nature may be, is Wealth, so long as
it is Wanted and Demanded : and no longer. He pointed out
N
178 THEORY OF CREDIT
that the local money of diflferent states is only Wealth where it has
power of purchasing ; and is not Wealth where it has no power
of purchasing
It has been shown that the Greek word xPVf^ which is one of
the most usual words for Wealth, is derived from xP<^oftat, to
Want or Demand : and that xPW« simply means anything that
is ** Wanted and Demanded " : and that things are only xrif^'^^
where tliey are xricrifia, or wanted and demanded : and tliat they
are not ^ruLwra where they are not ;(pr/o-t/xa
The very same doctrine is laid down in Eoman Law : it is
said that Wealth is anything which can be bought and sold. And for
that reason they class mere abstract Rights which are not
associated with any material substance as Fecunia, Res, Bona,
Merx, because they can all be bought and sold : and the same
doctrine holds in every system of Jurisprudence
Here it is quite clear that we have obtained the true Origin,
Cause, or Form of Value : it is Demand pure and simple. Value
is not a Quality of an object : nor is it the Quantity of Labor
expended on obtaining it : it is an affection of the Mind. When,
there is a Demand for things they have Value : when the Demand
increases (the Supply remaining the same) the Value increases :
when the Demand decreases, the Value decreases : and when
Demand altogether ceases, Value is altogether gone
The ancients unanimously held that xP^ta, Demand, is the
sole cause of Value : Aristotle says that it is xpcoi, or demand
for each other services which binds society together
Boisguillebert, the moniing star of Economics, saw this most
clearly
He says^ " Gonsammatton (Consumption or Demand) is the
principle of all Wealth." " All the revenues or rather all the
riches of the world consist in Gonsommation (Demand) : all the
most exquisite fruits of the earth, and the most precious products
would be nothing but rubbish, if they were not Gonsommes
(Demanded) "
The Italian Economists were very clear and consistent in showing
that Human Wants and Desires are the sole cause of all Value
* Factum de la J^-ancef ch. 5
DEMAND THE CAUSE OF VALUE 179
Genovesi clearly points out^ that the words prezzOy stima,
valuta, valore, are words of relation ; and not absolute : and that
they are not applied to Intrinsic Qualities. That though Money
is the proximate measure, the ultimate measure, to which not only
things, but their price is referred, is Man himself. Nothing has
Value where there are no men : and the very things which
have a less Value where men are few, have a very high Value
where there are many people : which is the reason why things and
services have a much higher Value in the Capital than in the
Provinces
"Men, however, do not give Value to things and services
unless they want them. Hence our wants are the first source of
the Value of all things : and Price is the power to satisfy our
wants "
Genovesi says that nothing has Value except in relation to
these Wants and Demands. He shows how prices are always
determined by Supply and Demand : and he says : " Value is the
child of Demand "
So, Beccaria says^ " Value is a substance which measures the
estimation in which men hold things "
Verri^ shows that it is the wants of men which give rise to
commerce : and as their wants increase so does commerce increase.
Nations which increase their wants, increase their power and their
happiness. Desire or Demand incites men to commerce. Commerce
requires Demand and abundance. Desire for the merchandise
sought, and abundance to give in exchange for it. And as a
nation progresses from the few and simple wants of the savage
state to new wants and necessities, it must proportionally increase
its annual production, so that it may have enough beyond its
annual consumption to purchase foreign goods
They then require something to ascertain the equality between
virhat they give and wliat they receive. ** Value is a word which
denotes the estimation which men make of a thing." Verri
also shows that all variations in price proceed from variations in
Supply and Demand
' Lezioni di Economia Civile^ part ii., ch. i
' Del disordine e de' remedj delle nionete neUo atato di Milano
5 Meditaxioni sulla Ecoiwmia Politica
n2
180 THEORY OF CREDIT
The Economists made all Value proceed from Demand : they
showed that things which remain without Demand (Consommation)
are without Value
Condillac* is very clear and explicit on the subject. He
begins by investigating the foundation of the Value of things :
and shows that it originates entirely from the Want and Desires
of men. Things which satisfy some want have utility : and this
Want or Estimation is called Value
" As people feel new wants they learn to make use of things
which they did not before : they give, therefore, Value at one
time to things to which, at another time, they did not'*
Hence, all Value resides in the Mind: and he says — **This
esteem is what is called Value : " and he shows that all variations
in Value proceed from variations in Supply and Demand
We have now shown that all ideas that Labor is the cause of Value
are erroneous and to be rejected : and that Demand is the Sole Cause
of Value
On the Error of th^ Expression Intrinsic Value
14. We have now to say something about an expression
which has been the cause of enormous confusion in Economics :
which has been one of the chief stumbling blocks in the apprehen-
sion of the subject of Credit : and which must be cleared away
All ancient writers, without exception, clearly understood that
the value of anything is some other thing external to itself : and
there is not to be found in any of them the slightest trace of such
confusion of ideas as the term Intrinsic Value
It is not easy to determine when the unfortunate expression
Intrinsic Value came into use. But it seems to have arisen in
this way : when unreflecting people thought about Value tbey
thought of the Quality of the thing which made it desirable : and
they called that its Value. They, therefore, gradually began to
speak of Intrinsic Value
So long ago as 1696 an able writer, Barbon, pointed out the
confusion which had arisen from mistaking the Absolute Qualities
of an object for the quantity of things it would exchange for
' Le Commerce et le Gouvernementy cli. i.
ERROR OF INTRINSIC VALUE 181
He Bays* — " There is nothiDg which troubles this controversy
more than for want of distinguishing between Virtue and
Value
*' Value is only the Price of things : and that can never be
certain : because it must be there at all times and in all places of
the same Value : therefore nothing can have an Intrinsic Value
" But things have an Intrinsic Virtue in themseWes, which in
all things have the same Virtue : the loadstone to attract iron :
and the several Quahties that belong to herbs and drugs ; some
purgative, some diuretical, &c. But these, thongh they have
great Virtue, may be of small Value or no Price, according to
the place where they are plenty or scarce : as the red nettle,
though it be of excellent Virtue to stop bleeding, yet it is a weed
of no Value from its plenty. And so are spices and drugs in
their native soil of no Value but as common shrubs and weeds :
but with us of great Value : and yet in both places of the same
excellent Intrinsic Virtue . . .
" For these have no Value in themselves : it is opinion and
fashion brings them into use and gives them a Value "
Barbon thus puts his finger on the very phrase which is the
bane of Economics at the present day — the expression Intrinsic
Value — which is to confound an Intrinsic Quality with an
External Relation
The following passage from Senior shows how easily even able
men are beguiled into this error. He says* — " We have already
stated that we use the word Value in its popular (?) acceptation
as signifying that Quality in anything which fits it to be given
and received in exchange : or, in other words, to be lent or sold,
hired or purchased
"So defined Value denotes a Belation reciprocally existing
between two objects "
Now, the Quality of a melon which fits it to be sold is its
agreeable flavor : its flavor, therefore, according to Senior, is its
Value (!) : and so defined, he says it means that it costs bs, !
That is, he defines the Quality of the thing to be its Price !
^A Discourse concefTung coining the New Money lighter ^ p. 6
* Political Economy i p. 13
182 THEORY OF CREDIT
This is exactly the confasion which the Economists careAilly pro-
vided against. The Qnah'ty which makes a thing desirable is its
Val lie i n use, or its Utility: and the Economists repeatedly explai ned
and declared that Economics has nothing to do with Value in use, or
Utility: bat only with Value in exchange, or Market Price
Smith, however, is the author who is chiefly responsible for the
confusion of the subject in modern times. He begins by defining
the Value of a thing to be any other Quantity it can purcliase —
to be something external to itself ; and, therefore, that its Value
increases or decreases, according as it can purchase, more or less,
of that external thing
He then suddenly changes his idea of Valae, and defines it to be
the Quantity of Labor expended in obtaining the object itself. Thus
Quantity of Labor expended upon obtaining the object itself, came
to be held to be its Value : and then Value came to be called Intrinsic
This unhappy phrase. Intrinsic Value, meets us at every turn
in modern Economics : and yet the slightest reflection will show
that to define Value to be something external to a Quantity : and
then to be constantly speaking of Intrinsic Value are inconsistent
and self-contradictory ideas
Thus over and over again it is said that Money has Intrinsic
Value, but that a Bank Note or Bill of Exchange are only the
representatives of Value
Money, no doubt, is the produce of Labor : but Smith himself
says that if Money would exchange for nothing it would have no
Value : so he admits that Exchangeability is the real essenceof Value
How then can the Value of Money be Intrinsic ? How can any-
thing have Intrinsic Value unless it has the thing it will exchange for
inside itself ? Money will exchange for anything — ^lands, houses,
corn, books, wine, jewelry, &c. : and each of these is a Value of
Money : but which of these is its Intrinsic Value ?
Money remains exactly the same in itself wherever it may be
placed : a hogshead full of sovereigns has immense Value in the
middle of London : but if a man had it by itself in a deserted ship
in the middle of the ocean : or in a barren iland, where would its
Value be ? Yet if it has Intrinsic Value in one place, it must
have it equally in any other place
ERROn OF INTRINSIC VALUE 183
A Bank Note payable on demand is of the Value of Money :
and why is it so ? Simply because it is exchangeable for Money.
Hence a Bank Note has Value for exactly the same reason that
Money has : namely, because it is exchangeable for something else.
Credit is the Right to demand Money : and Money is the Right
to demand something else. Socrates, in the Eryxias, shows that
it is only when and where that Money can be exchanged that it
has Value : when and where it cannot be exchanged it has no
Value. So, where a Bank Note or a Bill of Exchange can be
exchanged, it has Value : when it cannot be exchanged it has no
Value
Hence, the Value of Money and Credits of all sorts is essen-
tially of the same nature: though there may be different
degrees of it. A Credit, by the unanimous consent of all Jurists,
Economists and Merchants, is an article of merchandise, and
an exchangeable commodity, just like Money, or any other
material chattel: and this, whether it exists only in the
abstract form of a mere Right, or whether it be recorded on
paper
The expression Intrinsic Value is so common that pei-sons
are apt to overlook its incongruity of idea. It is, however,
a plain contradiction in terms : and if we use words of a
similar import, but whose meaning has not been so corrupted
in popular usuage, its absurdity will be apparent at once
Thus who ever heard of Intrinsic Distance ? or of an Intrinsic
Ratio ? The absurdity of these expressions is apparent at once :
but they are in no way more absurd than Intrinsic Value. If we
speak of the Intrinsic Value of Money, we may just as well speak
of the Intrinsic Distance of St. Paul's : or the Intrinsic Ratio
of five
To say that Money has Intrinsic Value because it is material
and the produce of Labor : and that a Bank Note is a Bill of
Exchange is only the Representative of Value : is just as absurd
as to say that a wooden yard measure is Intrinsic Distance : and
that the distance between two points one yard apart is only the
Representative of Distance
184 THEORY OF CREDIT
A Standard of Value u Impossible
15, That unfortunate confusion of ideas between Value being
the Qaantityof aw(?^A^ commodity which any Quantity will purchase,
and the Quantity of Labor embodied as it were in the commodity
itself, which is chiefly due to Smith and Ricardo, has not only led
to that mischievous expression Intrinsic Value, the source of endless
confusion in Economics, but also to the search for something which
very slight reflection would have shown to be impossible in the very
nature of things, namely, an Invariable Standard of Value
It is as well to explain what these Economists mean who are
searching for an Invariable Standard of Value
If we had a British yard and any foreign measures of length
before us we could at once perceive the difference between them :
and if we were told the measurement of any foreign buildings,
however remote in age and country, we could, by a very simple
calculation, reduce them to the standard of British measurement :
and compare them with the size of our own buildings
Those P]conomists who want an Invariable Standard of Value
want to discover and fix upon some single commodity by which they
can compare the Value of other things in all countries and ages
But the least reflection will show that such a Standard is
absolutely impossible by the very nature of things
Money is, indeed, termed the Measure of Value : and so it is in
exchanges which are effected at the same time and place. If we
are told that a quarter of corn is worth 405., and that a sheep is
worth 405. at a certain time and place ; we should say that they
are then and there of equal Value
But such matters are not the result of simple perception by the
senses, as the different measures of length and capacity. If a
quantity of gold were placed beside a number of other things, no
human sense could discern what their value would be. And the
most violent changes in their several Values might take place in
the market, without there being any visible sign of such a thing.
Value is a Mental Affection : and Values are not perceptible by
ocular demonstration, but they must be declared by the communi-
cation of Minds
STANDAKD OF VALUE IMPOSSIBLE 185
Moreover, it is not possible to agcertain the different Yalnes
of different Quantities of Gold obtained in different ages and
countries. If a Quantity of gold coin minted in the age of
Augustus ; an equal quantity minted in the reign of Elizabeth ;
and an equal quantity minted in China, were placed side by side
what human sense could discern the difference in Value between
them ? And yet, that is what those Economists require who want
an Invariable Standard of Value. They want something by which
they can at once decide whether Gold is of more Value in A.d. 80 :
in A.D. 1588 : or in a.d. 1888 : in England or in China : without
reference to anything else
But the only test of Value is an Exchange : and unless we can
effect an Exchange, there can be no Value. How can we exchange
an ounce of gold in the year a.d. 188 with one in the year A.D.
1588 : or with one in the year a.d. 1888 ?
Bailey well says ^ — ** Value is the relation between contemporary
commodities, because such only admit of being exchanged with
each other : and if we compare the Value of a commodity at one
time with its Value at another, it is only a comparison of the
relation in which it stood at these different times to some other
commodity. It is not a comparison of some intrinsic independent
quality at one period, with the same Quality at another period, but
a Comparison of Ratios ; or a comparison of the relative Quan-
tities in which commodities exchanged for each other at two
different epochs. If a commodity A in the year 100 was worth
2 B, and in 1800 was worth 4 B, we should say that A had
doubled its value to B. But this, which is the only comparison
we could institute, would not give ns any relation between A in 100
and A in 1800 : it would simply be a comparison between A and B
in each of these years
" It is impossible for a direct ratio of Value to exist between
A in 100 and A in 1800 : just as it is impossible for the relation
of distance to exist between the sun at the former period and the
sun at the latter period "
»an Value, p. 72
186 THEORY OF CREDIT
The fact is, that all this search after the impossible arose from
Smith's unfortunate idea that the Value of a thing is the Quantity
of Labor bestowed on obtaining it : which was^ as we have showa
in the Introduction, adopted by Ricardo
From this idea, it followed that if any commodity could always
be obtained with an invariable quantity of labor, it would be an
Invariable Standard of Value. Ricardo admitted that there was
no commodity which is always obtained by an invariable quantity
of Labor : and, therefore, for that reason alone, he admitted that
an Invariable Standard of Value is unattainable
An Invariable Standard of Value, however, is not only unattain-
able for the reason given by Ricardo, but it is in itself absolutely
impossible by the very nature of things. Because, Value is a
Ratio : and a single Quantity cannot he the Measure of a Ratio
A measure of length or capacity is a single Quantity : and can
measure other single quantities, such as different lengths or bodies
of capacity. But Value is a Ratio : and it is impossible, in the
nature of things, that a Single Quantity can measure a Ratio
It is impossible to say that, a: b : :x
It is manifestly absurd to say that 4 is to 5 as 8 : without
saying as 8 is to what : just as it is absurd to say that a horse
gallops at the Rate of 20 miles : without saying in what time
But there may be a Measure of Value
16. But though a Standard of Value is impossible by the very
nature of things, there may be a Measure of Value
Value being the Desire or Demand of a person to acquire some-
thing else, the Quantity of Money he is willing to give to acquire
it is the Measui'e of his Desire to obtain it : and, therefore, the
Measure of his Value for it
But Credit is also evidently a Measure of Value as well as
Money. Neither a merchant nor any one else will give more in.
Credit, which he is bound to redeem in Money, to acquire any
commodity, than he would give in Money itself. But if he wants
anything, he will give just as much in Credit as he would in
Money. Hence Credit is equally a Measure ot Value or Desire,
with Money
VALUE ONLY EXISTS IN THE MIND 187
Hence Money and Credit are the Measure of Value : and as it
is universally admitted by all Economists that purchases with
Credit aflPect prices in all respects equally with Money, it follows
that the aggregate of Money and Credit is the medium in which
Prices are measured : and that the aggregate of Money and Credit
constitutes the Circulating Medium or Currency : the medium in
which Prices are expressed
Value only exiats in the Human Kind
17. Value, then, like Color, Sound, and Odor, only exists in
the Human Mind. There is neither Color nor Sound nor Odor
in external nature. They exitt only in the Human Mind
According to the unanimous doctrine of ancient writers, and
all foreign Economists, Demand is the sole origin, cause, or Form
of Value. It is Demand or Consumption, and not Labor which
gives Value to a product. It is not the Labor which gives Value
to the product, but the Demand for the product which gives
Value to Labor
Hence it is not Labor which is the cause of Value : but Value
which is the inducement to Labor. It is not the Labor of the
Producer which constitutes a thing Wealth, but the Demand of
the Consumer
We conclude, then, that it is not Labor, but Consumption,
Exchange, or Demand which constitutes a thing Wealth : and we
trace the progress of a nation in wealth according as their wants
and desires increase and multiply. First, the demand for the
sustenance required by the body gives Value to the material
products of the earth, food, clothing, shelter, fuel. Then as their
tastes become cultivated and refined arises the Demand for works
of literature, art, and science : for painting, for sculpture, for
architecture, for the drama, for music. And those who minister
to these wants of the mind become wealthy, just as those who
minister to the wants of the body do. It is the Demand of the
public alone which makes these things Wealth. Hence in order
to be wealthy a people must be inspired with strong and various
188 THEORY OF CREDIT
desires : and to be willing to labor to gratify these desires : and
this shows the great importance, in an Economical point of view,
of national education. Heavy taxes can only be borne by an
industrious and wealthy people : and the multiplication of wants
and desires multiplies industry, multiplies Capital, multiplies
incomes, multiplies the persons able to bear the burden of
taxation : and I'enders the nation capable of great achievements :
and of taking a leading position in the councils of the world
GENERAL EQUATION OF ECONOMICS 189
Section III
On the General Law of Value: or the General Equation of
Economics
18. The last branch of our inquiry is to discover the General
Law of Value : or the General Equation of Economics. That is,
to discover a Single General Law which governs the changes in
the Exchangeable Relations of all Qoantities whatever their
nature may be, at all times and in all places
The acknowledged principles of Natural Philosophy show
that there can be only one General Law of Value : or a Single
General Equation of Economics
We have shown that there are three distinct species of
Economic Quantities : and we have generalised all the Funda-
mental Concepts of Economics, so as to grasp all these Quantities
These three orders of Quantities can be exchanged in Six
different ways. Our present inquiry is to investigate a single
General Equation which shall govern all these six species of
exchanges indifferently
Suppose that we make £ the general symbol of an Economic
Quantity : i.e., of anything whatever which can be bought and
sold, or exchanged : or whose Value can be measured in Money :
or which has purchasing power — and representing these various
Quantities under the general symbol, £, we may say that there
are in any country Quantities of this sort —
£459,621,340
£278,234,500
£826,342,784
&c. &c. &c.
190 THEORY OF CREDIT
Now, we affirm, by virtue of the great principle of the
Continuity of Scienter and of the great Algebraical doctrine of the
Permanence of Equivalent Forms, that whatever can be proved to
be true Economically of any one of this series of Quantities must
be true of them all
Now, looking at the series of Quantities placed above, who
could tell of what species they are ? Some may be land : some
houses : some corn : some timber : some cattle : some jewelry :
some money : some labor of all different sorts : some Credit or
Debts : some the Funds : or other public obligations : some copy-
rights: some Patents: some Shares in Commercial Companies, &c.
Now, as we have shown that Materiality, Permanence, and
Labor, are only accidentally associated in some cases with
Economic Quantities, and not with all : and that Exchangeability
is the only Quality which is common to all Economic Quantities :
it follows that Materiality, Permanence and Labor must be
excluded from any General Concept of an Economic Quantity :
and Exchangeability retained as its sole general Quality
Having thus obtained these Independent Economic Quantities,
the whole purpose and object of the science is to discover the single
General Law which governs the variations of their Exchangeable
Relations. It is clear that, by the principle of the Continuity of
Science, and the analogy of all Physical Sciences, however varied
and complicated the different phenomena of Value may be, there
can, by no possibility, be more than one General Law of Value :
or a single General Equation of Economics : whatever it may be
Fundamental Conditions of the General Equation of Economics
19. Now, let A and B be any two Quantities whatever
supposed perfectly general : it is quite clear that their Exchange-
able Relations are contained in the following limits —
00 A = OB
&c. = &c.
2 A — B
A = B
A = 2B
&c. = &c.
A « X)
GENERAL EQUATION OF ECONOMICS 191
The meaning of which is simply this — Let the Exchangeable
Belation between A and B gi*adua1]y and continuously change
from where the greatest possible Quantity of A will exchange for
the least possible Quantity of B, to where the least possible Quantity
of A will exchange for the greatest possible Quantity of B
Now the Law of Continuity says that a Quantity cannot pass
fi*om one amount to another by any change of conditions, without
passing through all intermediate degrees of magnitude according
to the intermediate conditions
Hence we may affirm by virtue of the Law of Continuity —
1 . That if it can he indubitably proved t/urt Any particular
Law is true at any One point in the range of Prices^ that same
Latv must necessarily be true at All points throughout the whole
range of Prices
2. That as the symbols A and B are perfectly general^ if any
Law whatever can be proved to be true in the Variations of the
Exchangeable Relation ofAnj Two Quantities whatever^ that Law
must necessarily be true in tJie Exchangeable Relation of All
Quantities whatever
Thus by the Lato of Continuity we are enabled to affirm
that —
If any Law whatever can be proved to be true at any one point
in the range of Prices ^ between Any Two Quantities whatever y
that same Laiv must necessarily be true at All points in the range
of Prices, and between All Quantifies whatever
And, as a necessary corollary from the preceding, we may
affirm that—
If any Law can be proved Not to be true with regard to the
Relation of Any Two Quantities whatever, that Latv cannot be a
General Law of Economics
Furthermore, as it is a universally acknowledged principle of
Natural Philosophy that that Law only is the true one which
explains All the phenomena, it may be laid down as an unquestion-
able truth in Economics that —
192 THEORY OF CREDIT
If two or more Forms of Expression will explain or cxcount
for any phenomena regarding Price^ or the change of Price, tJiat
Form of Expression only is to he adopted as the true one which
explains all the phenomena in the science, atid not that individiuil
ease, or class of cases, only
Now as we ha?e shown in the Introduction that the Ricardo-
Mill Theory of Value violates every one of these fundamental
principles of Natural Philosophy — and as Mill himself says that
the Laws of Economics are to be formed by consciously aud
deliberately folio win.j< the methods adopted in Physical Science —
it follows that the Ricardo-Mill Theory of Value is to be utterly
rejected : and we have now to investigate the true Law of Value :
or the General Equation of Economics
Economics is a Physical Science because it is a pure science
of causes and eiBTects. There being Three orders of Exchangeable
Quantities, and, therefore, Six different kinds of Exchange, the
object of the Science is to determine the Laws of the Phenomena
of these Exchanges — that is to determine the Laws which govern
the changes in their numerical Relations of Exchange. Hence,
we have a new order of Variable Quantities : and the Laws which
govern this new order of Variable Quantities must be in strict
harmony with the Laws which govern the Relations of Variable
Quantities in general. The same general principles of reasoning
which govern the relations of the stars in their courses, must
govern the varying relations of Economic Quantities
The fact is, that Astronomy is the physical science which is
the type of Economics. The fundamental problem of Economics
is identically the same as the fundamental problem of Astronomy.
The Astronomer sees a number of Quantities — the heavenly
bodies — moving in all sorts of directions— sometimes advancing,
sometimes apparently stationary, sometimes retrograding — aud
his object is to discover a single General Law which accounts for
and governs all these varying relations. So the Economist sees
a vast multitude of Quantities constantly changing their numerical
relations to each other, and his object is to discover a single
General Law which governs all these varying relations. Economics,
like Astronomy, is a pure Science of Ratios
Lauderdale's law of value 193
Lord Lauderdale's Law of Value
20. Now, how is the great General Law of Astronomy
determined ? In this way. Let the heavenly bodies at any given
instant be in any position. They then change their positions :
the problem is to discover the Law which governs these changes
of relation
We must proceed in exactly the same way in Economics
Let any number of Economic Quantities at any given time
have any given relation to each other. They then change their
relations to each other : then the problem is to discover the single
General Law which accounts for and governs these changes of
relation
Lord Lauderdale states the case in this way —
Take any two Quantities, A and B : which may vary with
respect to each other : First let A remain constant while B varies
Then the relation of B to A will change from Pour Causes
It would Increase in Value
1. From a Diminution of Quantity
2. From an Increase of Demand
It would Diminish in Value
1. From an Increase of Quanti
2. From a Diminution in
Now, as the Variation of A with respect to B will be governed—
by exactly the same Four Causes : it is quite clear that the
Variation of both Quantities will be governed by Eight Indepen-
dent Causes : and if these be connected in the form of an Equation,
that will manifestly be the true General Law of Value : or the
true General Equation of Economics
Thus, Lord Lauderdale has the credit of having established the
tnie General Equation of Economics. This comprehends the
whole science of Pure, or Analytical Economics, exactly as the
great Law of Newton's governs the relations of the heavenly
bodies
And as it is in the form of a fraction containing no less than
"Eight Independent Variables, it at once shows the supremely
complicated nature of the Science
194 THEORY OF CREDIT
This complicated Eqaation is the fall expression of what is
popnlarlj known as the Law of Supply and Demand. All
Economists admit that it is true when the prices of things are very
low : they also admit that it is true when the prices of things are
very high : they therefore admit that it is true at the extremes of
prices : and, therefore, as it is true at the extremes of prices : the
Law of Continuity affirms that it is necessarily true at all points
in the range of prices between the extremes : that is, that it is
universally true : and, therefore, that it is the true General Law
of Value : or the true General Equation of Economics
Remarks on the General Eqaation of Economics
21. The General Equation of Economics is, therefore, a
Compound Ratio of a complicated nature : and to apply it in
particular cases requires a profound knowledge of the circum-
stances of the case : but yet, it is demonstrably true : and the
whole Science must be constructed taking that Equation as the basis
In obtaining this General Equation, we have followed the
method invariably used in all Physical Science. We have obtained
the Independent Variables and connected them in a Grcneral Law
or Formula. This insures Certainty to the Science : but it is on
the last point that the real difficulty arises : namely, in giving
Precision, or Numerical amounts to the Coefficients. It is abso-
lutely impossible to say what numerical variations in Supply and
Demand produce definite variations in Value. This has been
attempted in some cases, as in that of com : but it is manifestly
impossible to obtain exact numerical data : and, in fact, though
the same General Law is true in all cases, it is perfectly well known
that it varies in every particular case : and the same absolute
variations in the Supply and Demand in various quantities will
produce great differences in the variations of their numerical Values
It is this impossibility of giving exact numerical Value to the
coefficients that makes many persons suppose that it is impossible
to make Economics an exact science. It is sometimes supposed
that for a science to be an exact one, it is necessary that its Laws
should be capable of exact Quantitative statement. This, bow-
ever, is an error which has been specially pointed out by Comte,
I
GENERAL EQUATION OP ECONOMICS 195
who well shows the difference between Certainty and Precision
in science. To constitute an exact Science, it is not necessary
that its laws can be ascertained with numerical Precision : but
only that the Reasoning be Exact or Certain. He says that a
dangerous prejudice has sprung up : that because the Precision
of different sciences is very unequal, their Certainty is too. This
tends to discourage the study of the most difficult : Precision and
Certainty are perfectly distinct. An absurd proposition may be
Tery precise : as that the angles of a triangle are equal to three
right angles. On the other hand, a Certain proposition may not
be Precise : as that a man will die. Hence, though the different
sciences may vary in Precision, that will not affect their
Certainty
This observation applies most forcibly to Economics. Some
persons are apt to despise it because it does not bring out its
results with the same precision as Mathematics. This, however,
is a grievous mistake. In Economics, the Causes of Phenomena
can be ascertained with absolute certainty ; and if we want to
produce any given effect, the method of producing it can be
pointed out with absolute certainty. This is all that is necessary
to constitute Economics an Exact science. Because the method
of producing a required result being pointed out with absolute
certainty : it has only to be put in force until the result is
produced
In considering the General Equation of Economics, we see the
application of Bacon's aphorism^ — " That which in Theory is the
Cause in Practice is the Rule "
No other Quantities but Demand and Supply appear on the
face of the Equation : it is, therefore, certain that no other
Causes influence Value or changes of Value, except Intensity of
Demand and Limitation of Supply. It is certain that neither
Labor nor cost of Production have anv direct influence on Value :
it can only be by affecting the Demand or the Supply : and that
no change of Labor or of Cost of Production can have any
influence on Value, unless they produce a change in the relation
of Supply and Demand
1 Nov, Org.y B. L, Aph. 3
02
196 THEORY OF CREDIT
By this means we are enabled to create a rigorously exact
Theory of Economics : and by reverently following the precepts
of the mighty prophet of Indactive Philosophy, and the examples
of the immortal creators of the varioas Inductive Sciences^ it is
seen that Economics, as a moral Science, is fitted to take rank
with Mechanics and Optics as a great Positive Indactive Physico-
Moral Science : and it is the only Moral Science capable of being
raised to the rank of an Exact Science
In interpreting, however, the General Equation of EconomieSf
it is necessary to make one observation. It is sometimes supposed
that Yalae is only affected by the actually existing quantity of
produce which is brought into the market. This, however, is not
so. The expected qaantity which may be brought into the market
has a most important influence on the Value of the existing
quantity. If there was a general failure of the coming crops,
that would exert a most potent influence on the present Value of
the existing stock of corn. Or, if prices had been very high in
consequence of great scarcity of supplies and the coming harvest
promised to be very abundant, that would exercise a very potent
influence in diminishing the Value of the present stock. Hence
the word Qnantity, in the general Equation, must denote the
Quantity, acttuil or expected
Similarly, the word Demand must denote the Demand, cutual
or expected
THEORY OF CREDIT 197
CHAPTER III
THE THEORY OP CREDIT
Origin of the System of Credit in Europe
1. If it were asked how that wonderful people, the Romans,
commencing with a petty village, gradaally extended their Empire
over so large a portion of the World, it would probably be said it
was due to their hardihood and their discipline. But, probably,
a cause which has been entirely overlooked, contributed in no
slight degree to the result — and that is their wonderful and
methodical habits of business
The Romans were, as far as we are aware, the creators of the
great system of Credit in all its branches
When the practice of writing became common at Rome, it
was established as a custom or law that every Dominue, or head
of a house, should keep a family Ledger, as strict and exact as
those of a modern banker. In this he was obliged to enter all
smns of money borrowed and lent : all trade profits and losses :
and these family ledgers were the only legal evidence of Debt
among Roman citizens receivable in the Courts of Justice. And
it was from these family Ledgers that the whole of the modem
system of bookkeeping and Credit has been developed
It seems that every occurrence was noted down day by day in
a waste book, termed Adversaria : and at the end of the month
the various items were arranged under their proper heads in
the Ledger, which was termed Tabula^ or Codex aceepti et expensi:
which was intended to be preserved as an heirloom in the family.
Every five years the Dominus was obliged to swear to the truth
of the Cod^ before the Censors : and it was regarded almost with
a species of sanctity
198 THBORT OF CREDIT
A great differeoce was made between the Adversaria and
the Codex. Cicero says^ — ^ He acknowledges that he has not the
sam entered in his Ledger (jOodex) : bat he insists that it is
entered in his daj-book {Adversaria). Are yon then so fond of
yonrself, and hare snch an exalted opinion of yoarself, as to sae
for money, not on the evidence of the Ledger, bat of yonr Day-
book ? It is arrogant to bring forward yonr Ledger, instead of
witnesses ; bat is it not madness to bring forward your own scraps
of writing and notes ? If these notes have the same force and
weight and authority as the Ledger, what is the nse of making a
Ledger ? to make entries in it ? or to keep it in regalar order ?
or to make a permanent record of old writings ? Bat if we have
an established custom to make a Ledger because we put no trust
in notes : is that to be considered of weight, and approved before
a judge, which we ourselves consider weak and unreliable ? Why
is it that we write notes without much care, and we write the
Ledger with great care ? Because the one is to last a month, and
the other is to last for ever. The former are soon erased : and
the others are preserved with religious care : the former preserve
the memory for a short time, the latter pledge the good faith
and honesty of a man for ever. Notes are thrown away : the
Ledger is kept in order. Therefore, nobody produces notes in
evidence in a cause, but they do produce the Ledger and read
the entries "
. This family Ledger was kept in or near the area, the chest or
safe in the 7'ablinum, or apartment opposite the door of the Atrium^
or central hall of the Roman house, where all the records and
archives were kept
The System of Credit
2. The great System of Credit comprehends-^
(1) The Creation of Obligations
(2) The Transfer of Credits or Debts
(8) The Extinction of Obligations
which will be fully discussed in the following sections
*iVo Moscio Comoedo
THE SYSTEM OF CREDIT 1&9
The Roman Jurists completely worked out the Juridical
principles of Credit : and these are suflBcient for all practical
purposes. But they are not suflBcient for the full scientific theory
of the subject. For they regarded the subject cliiefly from the
Creditor's point of view : and only slightly from the Debtor's
But every Obligation has two sides : the Creditor's and the
Debtor's : the Active and the Passive : or the Positive and the
Negative
Accordingly, for the last 150 years, from the days of Maclaurin,
Mathematicians have been in the habit of terming Debts Negative
Quantities. But very few have given any explanation of what
they mean by terming a Debt a Negative Quantity : and those
who have done so, from a want of knowledge of the principles of
Mercantile Law and the facts of Commerce, have entirely failed
in giving an explanation which can be received as suitable for
Economic science
If the subject had been handled by mathematicians who
were trained in Mercantile Law and practical business, there
never would have been the slightest diflSculty. But, unfortunately,
it has been treated by literary and mathematical writers who were
entirely deficient in the necessary knowledge : and they have fallen
into a series of errors which are fully provided for in the Digest,
and in every Continental treatise on Jurisprudence
It is well known that although mathematicians have been in
the habit of using the Algebraical Signs, or their equivalents, for
1,600 years, and have given the empirical rules for their com-
bination : it is only within the present century that their scientific
principles have been thoroughly understood. We must, therefore,
explain the modern Tlieory of Algebraical Signs, and their appli-
cation in mathematics and physical science : and then give an
exposition of the principles of Mercantile Law and the facts of
Commerce : and then discover the interpretation of these Signs
which is suitable for the particular circumstances of Economics
The doctrines of the Roman Jurists are, of course, expressed
in words. But we shall find that Jurists working separately :
algebraists working separately : and the practice of Mercantile
200 THEORY OF CREDIT
men acting separately and independently from their own instincts ;
are all in perfect harmony with each other. And when we fuse
these three together — an exposition of the facts of Commerce — ^an
exposition of the Juridical Theory of Credit — and show the
application of the Tlieory of Algebraical Signs to these facts of
Commerce and the juridical principles of Credit — we shall find a
most beautiful exemplification of the use of these Signs, strictly in
accordance with their use in mathematics and physical science
It is too oflen the custom to consider the system of Credit as
pure haphazard empiricism. The following sections will show that
this is an entire error : and that the whole system may be reduced
to the strictest scientific demonstration : we shall be able to carry
the Theory of Credit to a greater state of perfection than it was
left in by the Roman jurists, by removing an obscurity which has
puzzled jurists and divines for centuries : and we shall be able for
the first time to bring Economic Theory to the level of Mercantile
Practice
On the Method 0/ Oontracting a Loan among the Romans
3. For many centuries the Romans divided Property into
two classes according to the manner by which it might be
alienated, sold or transferred. That species of property which
they first possessed, and were first accustomed to consider as
the patrimony of the house, or Domu^, they termed ResMancipi:
and this could only be transferred by certain very strict formalities.
Other property which they held in less esteem at first, or which
they acquired afterwards, might be transferred by simple delivery.
This kind of property was termed Res nee Mancipi
The list of property classed as Res Mancipi was formed in the
earliest ages of the Republic : and was never extended beyond its
first limits. All new species of property was classed under Res
nee Mancipi
Thus, the money of the early Romans was copper: and
accordingly copper money was included under Res Mancipi : bat
Gold and Silver Money were of much later introduction, and fchey
were classed under Res nee Mancipi
LOANS AMONG THE ROMANS 201
Bural servitades in Italy were classed as Res Maneipi : bat
the Rights of Obh'gations, as well as all other Incorporeal Pro-
perty, were classed as Res nee Maneipi
The sale or alienation of a Res Maneipi conld only be effected
by certain very strict formalities, which were necessary to insure
a good title, in an age when written conveyances were nnknown.
This form of sale was termed Maneipium or Mancipatio, Gaius
says that it was effected in the presence of five witnesses, Roman
citizens of full age, and also in the presence of another citizen,
who held the pair of bronze scales, and hence called libripens.
The purchaser, holding a bronze ingot, said thns — ^' I say that
this man is mine by the Common Law of the Romans, and that
he is bought by me with this bronze ingot and bronze scales."
He then struck the scales with the ingot, and gave it to the seller
as representing the price
As has been shown, every Loan of Money is a Sale, in which
the property in the Money is ceded to the borrower. The Money
thus ceded was called a Mutuum; because it was given in exchange
for the Right to demand an equal sum at a future time. As aes
was a Res Maneipi^ every Loan of Money required to be made by
the Maneipium, or the sale ji^er aes et Lihram. But the Right of
the Obligation was a Res nee Maneipi^ and, therefore, it might be
transferred in other ways
The Bond of Law created between the two parties by the Sale
or Loan of the Mvtuum by the formality of the aes et libra, was '
termed a Nexus, tis: and Nexus was the only term used in the
time of the XII Tables (451 b.g.) to denote a Contract or
Obligation^
In course of time the cumbrous form of the weight and
scales were dispensed with, and a Contract, or Obligation, could
be created by simpler methods. These were the Ohligatio re: the
Obligation which was created by the Loan or advance of the
* It has long been the habit of Jurists to nse the term Nexus and Nexuniy indiscri-
minately to mean a Contract, or Obligation : but Professor H. Nettleship, of
Oxford, has shown that Nexus means the abstract Incorporeal Contract, and
Nexumf the material object to which it refers
202 THEORY OF CREDIT
thing itself : the OlUgatio verbis, or the Verbal Contract, termed
Stipulafio : the Obligatio Litteria, or the written Contract, created
by entries in the family Ledger: aud finally the Obligatio consensu^
or the Obligation created by mutual consent, without any formalities
On the Stipulatio : or Verbal Contract
4. The Stipulatio, or Verbal Contract, was made by solemn
question and answer in the presence of witnesses. It was the
most extensive form of making a Contract in Koman Law : and
all other Contracts might be transformed into a Stipulation
Supposing that the Stiimlatio was employed to create an
Obligation, or Contract of Debt, the lender delivered the sum lent
to the borrower, and asked him a question of this sort —
" Do you promise to deliver to me such a sum at such a date ? **
The borrower answered, "I do": and thus the Contract, or
Obligation was created
It is said in the Institutes that Stipulatio is derived from
stipulus an old word for firm, certain, ascertained : which perhaps
may come from sttps
The person who asked the question was termed Stipulator^ or
ReuA stipulandi
The person who answered was termed FromiUor, or Meus
jfromittendi
The Stipulatio, or Contract by question and answer, could only
form a Unilateral Contract ; or one in which only one party is
bound. If a Bilateral, or Synallagmatic, Contract was to be
created, it was necessary to perform two Stipulations
Several examples of Stipulatio occur in Plautus : as in Asinc^
ria, ii., 4, 48 ; Fseudolusj i., 112 ; iv., 6, 15 ; CurculiOj v., 2, 68 ;
8,31, 33 ; Bacch.y iv., 8, 41 ; Trinummus, v., 2, 34, 89 ; Rudens^
v., 2, 47
The Marriage Service of the Church of England is an example
of a Bilateral Contract effected by two Stipulations
The priest says to the man — " Wilt thou have this woman to
thy wedded wife ? " The man answers—" I will."
THE OBLIGATIO LITTERIS 203
The priest says to the woman — " Wilt thou have this man to
thy wedded husband ? " The woman says — " I will "
And by these two Stipulations the BUateral Contract of
marriage is created
On Arcaria Nomina
6. It was the duty of every Koman DominuSj or head of a
house to make an entry of every sum borrowed or lent in his
Ledger, or Codex accepti et expensi
If, therefore, he had lent a sum of money by any of the
methods of making a Loan, the Creditor would duly enter it in
his Ledger at the end of the month. When he had made this
entry it was termed Arcariiim Nomen : and the Debtor, of course,
was bound to make a correlative entry in his Ledger
But snch an entry as this in the Creditor's Ledger was not the
Contract : it was only evidence of the Contract. The Contract was
created by the actual advance of the money. It was, of course,
absurd to suppose that any person could create another person
his Debtor, by simply making an entry against him in his Iccdger
Cicero says that it is equally base for a man to make a false
entry of money lent in his ledger as not to make an entry of
money borrowed
On the Obligatio Litteris: or Written Contract
6. But an actual Contract or Obligation, might be made by
an entry in the Ledger
The borrower came to the lender, and in the presence of
witnesses, the lender advancing the Money, said to the borrower
something of this sort —
" Centum aureos expenses tibi tuli ?"
" Have I weigJhed out and given you 100 aurei f^
The borrower said — " Expenses mihi tulisti "
" Toil have weighed them out and given them to me "
The Creditor, then, with the consent of the Debtor made a
formal entry of the Loan in his Ledger : which was termed
Expensilatio
204 THEORY OF CREDIT
The corresponding entry in the Debtor's Ledger acknowledging
the receipt of the money was termed Acceptilatio
An entry of money lent made in the Creditor's ledger with the
consent of the debtor was absolately conclasive, and could not be
questioned. It formed a valid Contract, whether the money had
actually been advanced or not. And if an action was brought for
the money, the judge could make no inquiry into the actual
fects. A solemn entry made with the consent of the Debtor was
equivalent to a SUpulatio
The Creditor made an entry otpeeunia expensa lata^ or money
advanced, in his ledger : the Debtor made a correlative entry of
peeuma accepta relata^ or money received, in his ledger: and thus
the Ohligatio Utteru : or Written Contract was constituted
ThB Ohligatio Oonsensu : or Oonsensual Contract
7. In the year 469 A.D., the Emperor Leo abolished the
strict formalities of the Stipulation : and enacted that a consent
given in any form should be valid, if the parties agreed about it.
There was no necessity for any writing or witnesses
As an example of a Consensual Contract, we may give the
Customs of Trade. When any persons enter into a trade, or
have dealings with traders, there are certain well known and
recognised customs of trade, which, though they may be unwritten,
are legally valid. And the persons of that trade, and all those
who deal with them, give a consent to be bound by them
CREATION OF OBLIGATIONS 205
Section I
On the Creation of Obligations
8. Personal Credit, or Mercantile Character, is Purchasing
Power : and, as first pointed out by Demosthenes, and now
universally acknowledged, is Wealth. But Personal Credit does
not enter into Economics until the merchant actually exercises his
Credit, and makes a purchase with it
When a merchant purchases goods '' on Credit '' it is an
absolute sale, just as much as if it had been effected with money.
He acquires the actual property in the goods as fully and
effectually as if he had paid for them with money. In exchange
for the goods he gives a Promise to pay their price at a future
date. That is, he creates a Sight of action against himself.
This Right of action is a Credit or Oriance, or Debt, and is the
price of the goods, and is the property of the seller
Thus, at the very instant that the Property in the goods is
transferred to the buyer, a Contract or Obligation is created
between the two parties which consists of two parts —
1. The Bight to demand payment in the person of the
seller or Creditor
2. The Duty to pay in the person of the buyer or Debtor
These two Quantities constitute the Contract, Obligation, or
Bond of Law between the two parties
This Obligation consists of two equal and opposite Quantities :
and may be denoted by this symbol J _ oj^a f where the
(+ £100) denotes the Creditor's Bight to demand payment:
and the ( — £100) denotes the Debtor's Duty to pay
Also, if either of these Quantities be destroyed, the other is
also destroyed with it
206 THEORY OF CREDIT
Hence as these two equal and opposite Qaantities come into
existence together : can only exist together : and vanish together :
thej are analogous to Polar Forces
Dwinon of Opinion among Jurists as to the position of a
Debtor in an Obligation
9. We have now come to the most abstruse and subtle point
in Economics, which will demand the closest attention : because
it is the great Serbonian bog in which multitudes of writers,
literary and mathematical, have been swallowed up from a want
of knowledge of the most elementary principles of Mercantile
Law, and practical business : and its rectification and elucidation
will open up a completely new branch of inquiry of the greatest
novelty and interest
When an Obligation has been created between two parties by
the sale of Money or Goods on Credit, the case of the Creditor is
clear: in exchange for the Money or Goods he has received a
Sight of action. This is his property, which he can sell or dispose
of in any way he pleases, for other Goods or for Money
But a strong division of opinion exists among jurists as to the
position of the Debtor in the Obligation
When a merchant has bought goods and given a Bill at three
months in exchange for them— Is he in debt at the present time ?
Roman Jurists and English Jurists hold different doctrines on
this point
The Roman Jurists held that when a person has contracted a
Debt payable at a future time, the Debt is created at the time of
the Obligation : but that the Remedy is suspended until the time
for payment comes. Debttum in presenti, solvendum in future y is
the maxim of Roman Law. When the contract was created it
was said dies cedit : when the time for payment had come it was
said dies venit
But English Law holds a different view. As the word Debt in
English Law means the abstract Personal Duty to pay, it holds
that no Debt is created until the Duty to pay comes into existence,
i,e., until the day of payment has come
CASE OF A DEBTOR 207
It is a maxim of English Law that Credit nnexpired may be
pleaded nnder the General Issue : which means that if an action
is brought against a person who has contracted an Obligation
payable at a future time, before the time for payment has come,
he may reply that he is not in Debt at all
Thus Pitt Taylor says^ — ^^ In addition to these examples it
may be observed that whenever the Defendant can show that in
fact, no Debt ever existed before action brought, he may do so
under the plea of never indebted
Thus, for instance, if the action be for goods sold and
dehvered, he may defend himself nnder the plea by proving that
they were sold on Credit which was unexpired when the action
was commenced "
A few examples will show the correctness of this view
Suppose that a tenant takes a house or apartment, and agrees
tx) pay the rent quarterly. Suppose that the day after he had
entered into possession the landlord came and demanded his rent.
What would the tenant say ? He would say — " My good friend,
Mr. Landlord, I owe you nothing. The bargain is that I am to
have the use and enjoyment of this house for three months before
the rent becomes due and payable. My Debt, or Duty to pay, does
not come into existence till then : good morning to you "
So, when a farmer takes a farm on a lease of 19 years, and
becomes bound to pay the rent half-yearly, the agreement is that
he is to have the use and enjoyment of the farm for intervals of
six months before each instalment of rent becomes due. The
successive rents are intended and expected to be paid out of the
successive profits made out of the farm. And it is obviously
absurd to say that the farmer is indebted, at the present time, for
rent which only becomes due 19 years hence ; and is intended and
expected to be paid out of profits which will only come into
existence 19 years hence
The case is obviously the same with a merchant who has
bought goods and given in exchange for them his promise to pay
the money for them thi'ee months hence. He is not in Debt at
the present time. No Debt, or Duty to pay, comes into existence
until the Bill becomes due and payable : and the amount of the
Bill is not to be subtracted from his present property
' Law of Evidence. Vol. I.
208 THKORY OF CREDIT
The importance of the consideration consists in this. It is
commonly supposed that when a person is bound to make a
payment at a fnture time, the sum due is to be subtracted
from his present property : and that it is a diminution of it. It
is usual to denote Debts by the Negative sign — ; and according
to this view, if a person possessed £100, and was bound to pay
£80 three months hence : and therefore his property would be
represented by £100 — £30 : that his property would only be
£70. But this yiew is entirely erroneous. In this case the
sign — does not mean subtraction : what it does really mean will
be shown further on
The Debtor has the full property in his £100, to do with
exactly as he pleases. His Duty to pay has no present existence :
it is no subti*action from his present property. The expression is
not to be read as if he had only £70. The Debt is a mere
abstract Personal Duty : and a Personal Duty cannot be subtracted
from a material sum of hard money. The expression is to be read
this way. He possesses £100 in money, but coupled with the
Duty to pay £30 at some future given time. Hence the sign —
does not mean subtraction in this case : it is a mere Memorandum
that he has to make an exchange at some future time
Advantage of adopting the Conception of Economics as the Science
of Exchanges, or of Commerce
10. We now see the advantage of adopting and firmly
grasping the conception of Economics as the Science of Com-
merce or Exchanges. Because all the mechanism and phenomena
of the great system of Credit, which are a hopeless puzzle and
perplexity as long as Economics is ti*eated as the ^' Production,
Distribution, and Consumption of Wealth," become perfectly clear
and simple when it is understood to be the Science of Commerce
or Exchanges
Every case of a " Loan " of Money or a Sale of goods " on
Credit" is an exchange ; or an act of commerce. In exchange
for the Money or the Goods a Right of action is created, and is
the Price of the goods. This Right of action is a Saleable
Commodity: which may be bought and sold like any material
ERRORS OF MATHEMATICIANS 209
chattel : and it has value because it will be paid in money.
This Right of action may circulate in commerce exactly like a
piece of money : and eflfect any number of exchanges exactly like
a piece of money, until it is paid off and extinguislied : and then
it ceases to exist
The Debt was created by one exchange : it then may effect
any number of exchanges : and when it is due the holder of it
brings it to the Debtor who gives the money in exchange for the
Right of action. Thus the Debt is created by one excliange, and
is extinguished or annihilated by another : and» thus the whole
system and operations on Credit are merely a series of Exchanges
On the Errors made by some Mathematicians in terming Debts
Negative Quantities
11. The juridical Theory of Credit worked out by the Roman
jurists was suflBicient for all practical purposes. They explained
how Credits, Rights of action, or Debts are created ; how they
may be transferred ; and how they are extinguished. But this is
not suflficient for the full scientific Theory of the subject: because
they treated these Credits almost entirely from the Creditor's side
But in every Obligation there are two parties : the Creditor
and the Debtor
Now when two persons are bound together by an Obligation
such as that of Debt, it is usual to term the Creditor the Active
or Positive Agent : and the Debtor the Passive or Negative Agent
Hence to complete the full scientific Theory of Credit it is
necessary to develope it from the Debtor's or Negative side, as
well as from the Creditor's or Positive side
Accordingly for the last 150 years, from the days of Maclaurin
at least, mathematicians have been in the habit of giving Debts
as examples of Negative Quantities. But they have entirely
failed in giving an explanation of the term Negativcias applied to
Debts which is suitable for Economic Science
The explanation usually given is this — A man's property may
be considered as Positive; and his Debts as Negative: subtract
his Debts from his property : and the remainder, if any, is his
substance or capital
210 THEORY OF CREDIT
And as the national capital is the aggregate capital of all the
individuals in it, according to this doctrine, in order to find the
quantity of capital in the country, all tlie floating Debts in it
would have to be subtracted from all the property in it, and the
remainder would be the national Capital
So Peacock, the distinguished Algebraist, says — " If property
possessed, or due, could be denoted by a number or symbol with a
Positive Sign, a Debt would be indicated by a number or symbol
with a Negative Sign : or conversely. Such affections of Property
are correctly symbolised by the signs + and — : since they
possess the inverse relations to each other which these signs
require. For if to a person A there be given a certain property
or sum of money with, or added to, a Debt of equal amount; his
Wealth, or Property, remains the same as before "
Now, in a certain sense, these modes of statement have some
semblance to truth : if a pereon were going to retire from business
he would call in and discharge his debts or liabilities, and the
remainder, if any, would be his fortune
But such a mode of statement is quite unsuitable for
Economics. Economics is purely the science of Exchanges : and
it has only to do with Quantities while they exist ; and all
Exchangeable Quantities are Economic Quantities, and are tJie
subject of Commerce. Debts, or Credits, are a species of property
of the most colossal magnitude : and are the subject of the most
gigantic commerce of modern times. They are a species of
property far exceeding any other kind of property except the
land itself. And what are they to be subtracted from ? The
explanation given above by Peacock is entirely inapplicable
to the business of banking, as will be shown in a future chapter
The fact is that mathematicians have completely mistaken the
application of the signs + and — in this instance, from a want of
knowledge of Mercantile Law
Mathematicians are accustomed to treat of Quantities and
Operations, and as these may each be of opposite or inverse
qualities they apply the signs + and — to them
But in Economics the signs + and — do not aflfect Property,
but Persons
ERROR OF EULER 211
As will be shovm hereafter, Persons may stand in Inverse or
Opposite relations to each other as well as Quantities or Opera-
tions : .and Persons who stand in these opposite or Inverse
relations may be designated by the signs 4- and — , as well as
Quantities and Operations.
Every student of Mercantile Law will at once perceive
Peacock's error in the above extract : because Credits or Debts
are not Jura in re : they are Jura in Personam : and the passive
or Negative Debt is not Money owed by the Debtor, but the
abstract Personal Duty to pay money
Two Algebraists of the highest eminence, Euler and Peacock,
have attempted to explain the meaning of the Negative Sign as
applied to Debts : but they have both failed from a want of
knowledge of the principles of Mercantile Law
Error of Euler in terming Debts Negative Quantities
12. Euler says^ — **The manner in which we calculate a
person's property is an apt illustration of what has just been said.
We denote what a man really possesses by Positive numbers, using
or understanding the sign + : whereas his Debts are represented
by negative numbers, or by using the sign — . Thus, when it is
said of any one that he has 100 crowns, but owes 50 ; this means
that his real possessions amount 100 — 50 : that is to say 50
crowns
*' As Negative numbers may be considered as Debts : because
Positive numbers represent real possessions : we may say that
Negative numbers are less than nothing. Thus when a man has"
nojthing in the world and owes 50 crowns, it is certain that he has
50 crowns less than nothing : for if any one were to make him a
present of 50 crowns to pay his Debts, he would still be at the
point 0, though really richer than before "
It will be seen that the statement in the first paragraph
commits exactly the error which we have recently pointed out at'
length
^Algebra, p. 7
p2
212 THEORY OF CREDIT
Suppose that the person has 100 crowns : and is boand to pay
bO crowns at the end of a year. Then his property would be
correctly stated as 100 crowns — 50 crowns. But it would be
quite inaccurate to say that his property was only 50 crowns.
Because he has the 100 crowns which are his absolute property to
dispose of, or trade with, exactly as he pleases in the meantime :
and he is only bound to have 50 crowns at the end of the year, to
discharge his Debt
Moreover, as we have shown, the Debt is the abstract
Personal Duty to pay : and it does not come into existence until
the time for payment has come. Consequently the person is
not in Debt at all until the end of the year : and consequently the
Debt, which does not exist, cannot be subtracted from his property
But the owner of the Debt may put it into circulation : and it
may be sold, transferred, or exchanged, and produce all the effects
of money, any number of times, until it is paid off and extinguished.
So that there may be the 100 crowns and the Right to demand
the 50 crowns circulating simultaneously in commerce
Moreover, as the 100 crowns are solid money : and the Debt
of 50 crowns is only the Personal Duty to pay money : it is quite
evident that an abstract Personal Duty cannot be substracted
from a solid sum of hard cash
Moreover, by the Lata of Continuity ^ if we diminish the period
of payment gradually and continuously until it reaches : and
the Debt becomes payable on demand : that in no way alters the
general principles of the subject : a Duty to pay, though imme-
diately due on demand, cannot be substracted from a material
sum of money. The debtor's money remains absolutely intact
until he voluntarily buys up the Right of action against himself
by voluntarily giving 50 crowns in exchange for it
The fact is that the expression is to be read in this way : he
possesses 100 crowns : but coupled with the Duty to pay 50
crowns at some given time
In the second paragraph when the Debtor possesses crowns,
and owes 50 crowns, he is said to have 50 crowns less than
nothing. This clearly means that he is under the duty to pay
50 crowns : and has crowns to pay them with
EUROR OF PEACOCK 213
Now suppose that being In such a position, as Euler says, some
one makes him a present of 50 crowns to pay his debt with. He
pays the Debt : he is 50 crowns richer than he was before : but still
his Property is now 0. This is an example that + x + = +
Thus Euler is right so far as he goes : but he has stated only
one-half of the case. Because there is another combination of
Algebraical symbols which gives + : namely — X — : and
there is another method in commerce of arriving at the same
practical result
As any person whatever may give the debtor 60 crowns to pay
his debt with, suppose that the Creditor does so. Then having
received the 50 crowns in a present from the Creditor, the Debtor
hands them back to the Creditor in payment of the Debt : which
is then extinguished. The debtor is now, as in the former case,
richer by 50 crowns than he was before : and his property is now
The same result may be attained in another way. Suppose
that the Creditor simply Releases the Debtor from his Debt :
then, as in the former case, his property would be : and he
would be 50 crowns richer than he was
Now, if crowns are +, and to give is also + : then a Debt
is — , and to Cancel or take away is also — : consequently to give
money is + x + : and to Release or Cancel a Debt is — x — ;
and the position of the debtor will be exactly the same after each
operation
This shows that the Release of a Debt is, in all circumstances,
equivalent to a Payment in Money
So it is shown that in Commercial, las in all Algebra,
-f X += — X — : an example of the Permanence of
Equivalent Forms : and a principle of the most momentous
importance in modern commerce
Error of Peacock in terming Debts Negative Quantities
13. Peacock, Dean of Ely, who published the most philoso-
phical treatise on Algebra in his day, and who was the first to
introduce the Theory of Signs into a standard treatise, endeavoured
to apply the Theory of Signs to the Theory of Credit or Debt,
But he has fallen into the error so carefully provided against in the
Digest, and by all Jurists since
214 THEORY OF CREDIT
He says^ — '^ A merchant possesses a pounds and owes b pounds :
his substance is, therefore, a — b : when a is greater than b
But since a and b may possess every relation of value, we may
replace ^ by a — e,OT a + e: according as a is greater or less
than b : in the first case we get —
a — b = a — (a — e) = c
and in the second—
a — b '^^ a — (a + c) = — c
If, therefore, e expresses his substance or property when solvent,
— c will express the amount of his Debts when insolvent : and if
from the use of + and — as signs of affection or quality in tliis
case, we pass to their use as signs of operation, then, inasmuch as
a + ( — c):=a — c; and a — ( — c)s=a + c
it follows that the addition of a Debt ( — c) is equivalent to the
subtraction of property, c, of an equivalent amount : and the
subtraction of a Debt ( — c) is equivalent to the addition of
Property, c, of an equal amount : and it consequently appears
that the subtraction of Debt, in the language of symbolical
Algebra, is not its Obliteration or Removal, but the change of its
affection or character from Money or Property owed to Money wr
Property possessed "
Peacock, as is seen, arrives at the conclusion that the subtrac-
tion of a Debt is equivalent to the addition of Property : the
conclusion is right, as we have seen above : but his method of
arriving at the conclusion is erroneous : as has been so repeatedly
pointed out by Jurists. The Negative Sign — is not a sign
affecting the Money or the Property, but it is a sign affecting the
Person of the Debtor
If such a distinguished mathematician as Peacock was, had
only reflected, he could not have failed to perceive that his inter-
pretation of the Negative Sign, as applied to Debts, could not
be correct. Because the signs -h and — always refer to Similar
Quantities, but of opposite Qualities. Now the sign -f represents
the Creditor's Personal Right to demand a sum of Money : and a
material sum of Money can, by no possibility, be the Inverae of an
Abstract Personal Right. It must be something which is the
Inverse of a Right : and the Inverse of a Bight is a Duty
^Algebra, 2nd Edit, Vol. H., p. 15
ERROR OF PEACOCK 215
Peacock's mode of stating the qaestion confoands the distinc-
tion between a Debtor and a Trustee : a person who merely holds
a sum of money, to which another person has a Right, is a Trustee
and not a Debtor : a Debtor is a person who is under the abstract
Personal Duty to pay a sum of money : but until he voluntarily
pays it, the Creditor has no Right or Property in it
Moreover, Peacock's mode of statement sins against the
Philosophy of Science : because Economics being the Science of
Exchanges, and that only : all questions in Economics must be
stated in the form of an Exchange : Economics has nothing to do
with addition and subtraction : but only with exchange : and
all questions of contracting and extinguishing Debts must be
stated in the form of exchanges. All Debts are created by one
exchange : and they are extinguished by another exchange. And
this, as we shall see, gives a complete explanation of the subtleties
and perplexities of the Theory of Credit
In this case, therefore, the signs + and — , as signs of operation
do not mean addition and subtraction. What they do mean will
be shown further on
The result which Peacock arrived at is correct : but it is not
produced in the way in which he says it is : but in the way he
says it is not
Further Error of Peacock
14. We ha?e shown that Peacock is mistaken in his attempt
to apply the sign — to debts : but he is also mistaken in his
attempt to apply the symbol ^'^ to property
He says^ — " If a denoted property possessed, and — a a debt,
av/^, a might denote property neither possessed nor owed, such
as a mere deposit might be "
He has explained his views at greater length further on^ —
" There are many cases, however, of quantities which cannot be
represented, unless symbolically, by lines, which are susceptible of
affections denoted by + and — , which are appropriate to their
specific nature : thus, if a represented property possessed, — a may
represent the same property owed : under such circumstances what
is the meaning which may be attached to a >/^l and — a V^^ ?
^Algebra, Ist Edit., p. 177
UUd, p. 866, Art. 447
216 THEORY OF CREDIT
If we consider the succession of quantities —
aya>V—iy afx/Hlj a(>/-^j
or, a, a \/-^l, — a, — a x/^I^i
and if the first represents property possessed, and the third
property owed, the second can neither represent property possessed
nor owed, under the same circumstances or by the same person,
inasmuch as in such a case, it would be symbolically represented
by a, or — a: it may represent, however, property deposited,
which admits of similar relations when considered as property
possessed and property owed by another peraon: under such
circumstances, the affectation of a denoting property possessed by
A by the sign V^T, would convert it into property possessed by B :
and the affectation of a>/I^ by>/^^ would convert property owed
by A into property owed by B : and fourthly, the affectation of
— a>/^ by \/^^ would convert property owed by B into property
possessed by A : the repetition of the process of affectation by the
sign n/^iTi would reproduce continually the same succession of
transfers of property from A to B, and of conversions of property
possessed into debt, and of debt into property possessed, which is
required to correspond to the succession of the same symbolical
results
** In this case the interpretation of the sign V^ which we have
given, satisfies the symbolical conditions, and also coincides with
the interpretation of the meaning of the signs + and — , which is
otherwise established : we cannot give it the additional authority
of the coincidence of this interpretation with the interpretation of
the meanings of the quantities corresponding to a^ and — a^ for
those quantities in the case under considemtion admit of no
interpretation "
It is really impossible to extract any intelligible meaning from
this use of the sign V^ to property
The fallacy underlying the whole paragraph is the one which
is so common among lay writers — namely, that a Debt is property
owed. A Credit is the abstract personal Right residing in the
Creditor, and the Debt is the abstract Personal Duty to pay
residing in the Debtor : and these opposite personal affections are
correctly represented by the symbols + and — : but they have
no relation to any specific money or other thing
ERROR OF THORNTON 217
Now the symbol V^ denotes that operation which being twice
repeated changes + into — . If we move a line throngh 90°, it is
perpendicular to its former position, and is denoted by the sign
n/^Ti : and if we move it through 90° more, it then forms a straight
line with its former position ; and is that denoted by the sign —
But depositing a thing twice with a person does not change
property into a debt : nor does it transfer the property. The fact
is, that if the sign>/-^ had any application at all to Economics, it
would mean that operation which being twice repeated changes a
Bight io demand into a Duty to pay. But what possible operation
could have that eflTect ? Absolutely none whatever. Consequently,
it is evident that the sign^/lli can have no application in Economics
Economics is a science of one dimension : it acts entirely in
single lines between persons. Now the sign^^ is not applicable
to any science of one dimension : it requires a science of at least
two dimensions, such as an area
De Morgan has expressed similar sentiments in his article Algebra
in the English Cyclopaedia— " It is impossible that a perfect
Algebra can be founded on ideas of time, loss and gain^ or any in
which only two directions can be imagined. Space, from the
infinity of directions which it admits, is as yet the only perfect
medium of explanation. Time before and time after a certain
epoch may be represented by the Positive and Negative quantity :
but what is there in the idea of time to which the sign^^^l can
possibly apply ? Again, show us a commercial operation which
performed upon a gain produces a sort of result which can neither
be called a gain or loss, but which repeated two or three times
upon a gain turns it into a loss — and we can immediately see a
system of Commercial Algebra, in which>/^ shall be intelligible "
But no such operation can be imagined
The fact is, that Peacock's error consists in interpreting the
symbol >/— i as a Sign of Affection^ whereas it is purely a sign of
Operation
Error of Thornton and Gemuschi on Credit
15. We have shown the error of two very distinguished
Algebraists in their interpretation of the Negative Sign as applied
to Debts : we have now to point out the error of a plausible view
held by two distinguished bankers
218 THEORY OF CREDIT
It has been asserted that Credit adds nothing to the resources
of the world, because it is neutralised by something else
Any person practically conversant with commerce, and, seeing
that the enormously greater portion of commercial operations are
carried on by Credit, would think it a strange doctrine that Credit
adds nothing to the resources of a nation, or of an individual :
because it is now universally agreed that the only true definition
of Wealth is ** Anything which has Purchasing Power : " the
Wealth of a nation or an individual is therefore their Purchasing
Power : and their Purchasing Power is their Money together
with their Credit : Credit is, therefore, Purchasing Power over
and above, and additional to, Money : and hence it must be a
Besource cumulative to Money
Some writers, however, have maintained the contrary doctrine
in a very plausible way : but which we shall show to be erroneous
Henry Thornton, an able man, a banker, and one of the
authors of the Bullion Report says — ** Paper constitutes, it is true,
an article on the Credit side of the books of some men, but it
forms an exactly equal item on the Debit side of the books of
others. It constitutes, on the whole, neither a Debt nor a Credit"
So another eminent banker, M. Cernuschi, says — "The
balance-sheet of every individual contains three accounts :
existing goods, Credits and Debts. But if we collected into one
all the balance-sheets of every one in the world, the Debts and
the Credits mutually neutralise each other, and there remains but
a single account : existing goods
" The totality of goods, therefore, forms the general inventory.
There is the first matter of exchange. The Debts and Credits are
subsidiary matters. Debts and Credits are reciprocally trans-
mitted as goods are transmitted ; but however great or however
small they may be : and through whatever hands they may pass :
Credits for some, Debts for others : they add nothing to, and
take nothing away from the general inventory "
The argument of Thornton and Cernuschi is simply this.
Suppose A to have £100 in Money, and also a three months'
bill of £50 on B. Suppose B to have £100 on Money : and at
ERROR OF THORNTON 219
the same time to have accepted a Bill for £50 at three months'
to A. Then A's property would be stated thus : £100 -f £60:
B's property would be stated thus, £100 — £50
Now the argument of these writers is this — that the + £50
and the — £50 balance and neutralise each other : and the result
is : which, according to them, is the same thing as saying that
these quantities do not exist at all
This view might perhaps seem at first sight somewhat specious :
but a very little reflection will show that it is erroneous
It alleges that if there are two equal and opposite quantities
in existence at any instant, which may neutralise each other's
effects : and the result is : that that is the same thing as saying
that these two quantities do not exist at all
Suppose that two equal and opposite forces act upon a particle
at rest : they neutralise each other's effects : the result is :
but it would be highly erroneous to say, for that reason, that they
do not exist at all
Suppose that the Government, on a division, has 345 sup-
porters and 300 opponents : the 800 members on each side
neutralise each other's effects : and the result is that the force of
the Government is 45 : but that does not imply that the 600
members do not exist at all
Hence, even if it were true that these equal and opposite
quantities. Credits and Debts, neutralised each other's effects : it
would be erroneous to say that that is the same thing as saying they
do not exist at all
The error consists, as we have pointed out, in supposing that
in the case of Obligations not yet due, the Debt is an existing
Negative Quantity neutralising the effect of the Credit
The Credit, or the Right of action of the Creditor, is an
existent Quantity, which may be bought and sold like Money, or
any other chattel : the Debt, or Duty to pay, does not come into
existence until the Credit has ea^ired, and the day of payment
come : and consequently it cannot neutralise the Credit
And, even supposing that it is payable on demand like a
Banking Credit, it is still an Economic Quantity, until payment
is demanded, and it is paid off: and the Debtor's property
220 THEORY OF CREDIT
remains entire until he volantarily gives some of it to bay up
this Right of action. These considerations are of supreme
importance as we shall see, in understanding the nature of
Banking
Personal Credit is a person's Purchasing Power o^fer and above
bis Money : hence Credit is Wealth cumulative to Money : and
the whole mass of Circulating Credits are Economical Quantities
over and above and additional to Money : and they are in their
nature and effects in every respect equivalent to an equal quantity
of money
On the Application of the Theory of Algebraical Signs to
Economics
16. The perplexities of the Theory of Credit, which have
baffled all the Economists in the world to explain, can only be
unraveled by the great modern doctrine of the separation of the
signs of Affection or Distinction and Operation
As the introduction of this great doctrine into Economics is
perfectly novel, we shall have to treat of it rather fully : especially
as there may be students of Economics who are not very familiar
with it in other sciences. And we shall endeavour to make it
intelligible to those who have not become acquainted with it
already
It is a remarkable example of the almost universal truth that
practice has always preceded theory, that even the practice of
science long preceded the theory of science
Sixteen hundred years ago Diophantus said —
'" Defect multiplied into defect gives existence ''
And it is said in the Basilica —
" Svo apnyccis fttav voiovatv KaTtiOecriv*'
" Two Negatives make an Affirmative "
This is simply the Algebraical doctrine that — x — = + :
and from the days of Diophantus this has been perfectly well
understood as an empirical rule in Algebra
THEOUY OF SIGNS 221
When the great pioneers of Algebra in modern times — Harriot,
Permat, Vieta, Des Cartes, Cardan, Tartaglia and others, trans-
lated their reasonings into general symbols, they fonnd that they
had created a machine whose working they were not able fnlly to
apprehend
They fonnd, among other things, that many problems prodaced
Negative answers. Unable at first to apprehend the meaning of
Negative answers, they believed that they had no real interpreta-
tion : and they called Positive roots true, {vera radices) : and
Negative roots false (ficta radices)
In the progress of Natural Philosophy the Negative sign was
nsed to a vast variety of quantities : bat no general Theory of
Signs was devised : and the progress of mathematics was much
impeded by the want of this generalisation
The rule that — x — *= + was universally adopted in
practice, because it alone produced right results. But Algebraists
were wholly unable to explain it : it was wholly unknown to Newton:
and when he tried to explain it the great Euler babbled like a child
Even so late as 1813 a distinguished mathematician at
Cambridge denied the existence of, and ridiculed the idea of there
being, any such things as " Negative *' Quantities
Many centuries ago, at least about 1100 A.D., the Hindoo
Algebraists had made considerable advances in explaining the
Theory of Signs : but nothing was done in Europe till nearly the
end of the last century. Since then a new spirit of philosophy has
been breathed into the old science : and a number of distinguished
algebraists, Arbogast, Argand, Buee, Armand, Camot, Warren,
Peacock, De Morgan, and others, have completely established the
Theory of Signs : and their laboi*8 have resulted in what is called
the Separation of the Signs of Affection or Distinction and
Operation
In most of the common books on Algebra the student is told
that the sign + means addition, and the sign — means subtraction
It is said that + X + gives + : and that — x — also
gives + : a doctrine which, without further explanation, is an
inscrutable mystery, not to say an absurdity: as appears in
Freud's comments on the subject
222 THEORY OF CREDIT
Writers who are not versed in Natural Philosophy have no
conception of the signs + and — meaning anything but addition
and subtraction. It is no doubt perfectly true that in some
cases these signs do have that meaning : but that is only
one of their meanings. Everyone who has any knowledge of
Mathematics and Natural Philosophy, knows perfectly well that in
reality these signs have an immense variety of meanings, according
the particular circumstances out of which they arise : or the body
of facts to which they relate : and that it is wholly impossible to
determine their meaning until we know the particular circum-
stances under which they arise
We must now explain the general use of these signs in Mathe-
matics and Natural Philosophy, and show how they are to be
interpreted in the particular body of facts which constitute the
science of Economics
All Sciences deal with Quantities and Operations
17. In order to explain the matter in the simplest way
possible, it may be said that all Sciences deal with Quantities and
Operations
Now, throughout all Nature, there is Inverseness, Opposition,
or Contrariety — Inverseness, Opposition, or Contrariety of Qua-
lity : and Inverseness, Opposition, or Contrariety of Operation
Thus, Similar Quantities may be endowed with Inverse,
Opposite, or Contrary Qualities: and when they are so, it is
invariably the custom in Mathematics and Natural Philosophy to
distinguish them by the signs + and —
These Signs, so used in Mathematics and Natural Philosophy,
denote the Inveree, Opposite, or Contrary Qualities of Quantities
of a similar nature : no matter what the Inverseness, Opposition
or Contrariety may consist in : it may be of any sort or descrip-
tion whatever : they are then usually termed in mathematical
Works, Signs of Affection: or we may, with equal propriety,
term them Sig^s of Distinction or of Quality
THE ALGEBRAICAL SIGNS 223
Bafc, also, Inverse, Opposite, or Contrary Operations may be
performed on these Quantities so afiFected by Inverse, Opposite,
or Contrary Qualities : and these Inverse, Opposite or Contrary
Operations are also denoted by the same Sigus + and — . And
any Operations of an Inverse, Opposite or Contrary nature are
denoted by these signs : no matter what the Inverseness,
Opposition, or Contrariety, may consist in : it may be of any
sort or description whatever. They are then termed Signs of
Operation
Now, in every new body of facts which is brought under
scientific control : and in every new Science whatever: Inverseness,
Opposition, or Contrariety is sure to appear. And, consequently,
the Signs + and — receive new applications of meaning in every
new science which comes into existence. And it is quite impossible
to determine the meaning of these Signs until we kuow the Nature
of the Quantities which they refer to : and the Nature of the
Operations they denote
As each of the Physical Sciences has been brought under the,
control of Mathematics these signs have received new meanings,
according to the nature of the Quantities and the Operations they
denote. Consequently they have already received a vast variety
of meanings: and they will continue to receive new meanings
according as every new body of facts is brought under mathe-
matical control
We have now to determine what is their meaning and
application in the body of facts which is denominated the .
Science of Economics, when it is brought under mathematical
control
It is the Combination of these Signs denoting Quantities
affected by Inverse, Opposite, or Contrary Qualities with the
same Signs denoting Inverse, Opposite, or Contrary Operations
performed upon them : that is the combination of the Signs of
Affection or Distinction with the Signs of Operation, which gives :
rise to the wellrknown Algebraical Rules—
224 THEORY OF CREDIT
+ X + gives -h
+ X — „ —
— X + „ —
— X — „ H-
These Laws from the necessary principles of Natural Philosophy
are true in all sciences : and in all cases whatever. Thej are
universally true in all departments of Mathematics and Natural
Philosophy ; and, therefore, they must be equally true in Econo-
mics when brought under the dominion of Mathematics
They are alone capable, by giving a due adaptation of their
general meaning to the particular facts of Economics of completely
solving the Theory of Credit, which has hitherto been the
opprobrium of the Science
There are in Economics, like as in every other science what-
ever, quantities possessing Inverse, Opposite, or Contrary Qualities,
or Properties : and, therefore, following the strictest analogy of
Mathematics and Natural Philosophy, we shall distinguish them
by Opposite Signs
And also Opposite Operations may be performed upon these
Quantities aflPected by Opposite Qualities : bringing into play the
well-known Algebraical Rules : which will lead to consequences
which may surprise some readens : and enable us to erect Econo-
mics into a great Physical Science
Examples of the Algebraical Signs applied to Quantities
18. We will now give some examples of the signs -h and —
applied to Quantities of a similar nature but of Opposite Qualities :
to furnish us with analogies to guide us to their application in
Economics
If we take the meridian of Greenwich as 0, degrees of Longi-
tude East and West of Greenwich are Opposite to each other : if,
then, the ones are called -f , the others may be called —
So, if the Equator be denoted as 0, degrees of Latitude North
and South of the Equator are Opposite to each other : and if the
ones are denoted by -f , the others will be denoted by —
SIGNS APPLIED TO QUANTITIES 225
So, in Algebraical Oeometrj, ia which it is necessary to fix the
position of the lines, if any fixed point be taken as 0, lines drawn
in opposite directions from it, either to the Right or to the Left :
or Upward, or Downward from it : are distinguished by the
opposite signs H- and —
So, if a line revolving in one direction be denoted by +, then
when it revolves in the opposite direction it is denoted by —
If two mechanical forces act in opposite directions they are
distinguished by the opposite signs + and —
If 1 be multiplied by powera of a, the results are termed
Positive powers of a : if 1 be divided by powers of «, the results
are termed Negative powers of a
In modern Kinematics, an accelerating force is one which
canses a body to change its Rate of Velocity : if it increases the
Rate of Telocity, it is termed Positive : if it diminishes the Rate
of Velocity, it is termed Negative
In errors of observing phenomena, if the error is greater than
the truth, it is termed Positive : if it is less than the truth, it is
termed Negative
In mercantile papers it is usual to compare the weekly results
of the railway traffic with the results of the corresponding weeks of
the preceding year : if the results of the present ye^r exceed last year's
the difference is denoted by + : if they fall short the difference is
denoted by —
Mr. Ball says^ that there is good reason to believe that the
signs + and — which have exerted so potent an influence in
mathematics originated in the German warehouses, where it was
the custom to mark packages which exceeded a certain weight
with a + , and packages which feU short of the proper weight
by a —
A curious instance of this may be cited from steam navigation.
Owing to the resistance of the water, the paddles or the screw of
a steamer do not in general propel the vessel through the water so
fast as they would do if there were no resistance. This Loss of
speed is termed the SUp. But in the case of the screw, by giving
the stern of the vessel a peculiar shape, the paradoxical result may
be obtained, that it may b^ made to go through the wniev faster
M Short Tlixtorf/ of Mathematics^ p. 185
226 THEORY OF CREDIT
than it would do if the screw were working in a solid. In this
case, the difference between the theoretical and the actual speed is
a Gain instead of a Loss : and this Gain is termed the Negative Slip
And the instances which might be cited from the various
mathematical and physical sciences are innumerable
Now, the idea of Opposition is applied to a continuous line :
or to motion in a contiimons line. If any point be taken as 0,
then the part of the Une on one side may be denoted by +, and
the part on the other side by —
Thus, in a thermometer, some fixed point, as the freezing point,
is taken as : and degrees above that are termed degrees of Heat
and denoted by + : degrees below 0, are termed degrees of Frost,
and denoted by —
Now, suppose that the mercury rises from 10** of Frost to 15° of
Heat, the degrees passed over on each side of must be added
together. That is, the Negative degrees must be added to the
Positive degrees : and not subtracted from them
In Natural Philosophy, Time is considered as Motion in a
continuous line. If, therefore, any point in Time be fixed on,
and denoted by 0, then Time on Opposite sides of this point will
be denoted by Opposite signs. If Time before this epoch be
denoted by +, then Time after tliis epoch will be denoted by
— : and the successive intervals of Time, whether years, months,
weeks, days, or hours will be denoted thus —
+C, + 5, + 4, + 3, + 2, + l,0,— 1,-2,— 3,— 4,— 5,— 6,
If the birth of Christ be taken as the epoch, or 0, then years
before Christ will be Positive : and years after Christ will be
Negative. To find the total number of years from the foundation
of Kome to the present time we must add -\- 753 years, and — 1889
years together : or 2642 years altogether
In short, in the most general terms possible, take any Quantity
whatever it may be : and then take its Opposite, Inverse, or
Contrary: then if one of these be denoted by -f-, the other will be
denoted by —
SIGNS APPLIED TO PERSONS 227
Thus, Up and Down: Right and Left: Before and Behind:
Before and After: Time Past and Time Future: Above
and Below : Face to Face : Back to Back : Erect and
Inverse : Concave and Convex : Sympathy and Antipathy :
Virtues and Vices : Rewards and Punishments : Bights and
Duties : Active and Passive : and innumerable other things :
are all Inverse, Opposite, or Contrary to each other: and
may all be distinguished by the opposite signs -h and —
The hi^ns -f- and — inay also he applied fo Persons who stand
in Opposite relations to each other
19. Mathematicians are only accustomed to deal with Quan-
tities, mathematical and physical, which are endowed with Inverse,
Opposite, or Contrary Qualities : and they universally apply the
signs + and — to them
But persons may also stand in Inverse, Opposite, or Contrary
relations to each other : and the signs + and — are equally
applicable to denote the Inverse and Opposite Relations of
Persons, as to denote the Inverse or Opposite Qualities of
similar mathematical and physical Quantities
Thus, Creditor and Debtor : Master and Servant : Sup-
poiters and Opponents : Tutor and Pupil : Examiner and
Examinee : Flogger and Floggee : and in innumerable other
cases: Persons stand in Inverse or Opposite relations to each
other
In all these cases the one party is termed the Active or
Positive Agent : and the other party is termed the Passive or
Negative Agent
And in the Nexus, Contract, or Obligation between such
persons, the Right of the Active or Positive agent is termed the
Active or Positive Right or Duty, and the Duty of the Passive or
Negative agent is termed the Passive or Negative Right or
Duty
Thus, Jurists term the Creditor's Right of action the Active
or Positive Right : and the Debtor's Duty to pay the Passive or
Negative Right
Q2
228 THEORY OF CREDIT
Example of the Application of the Positive and Negative Siffns
to Time
20. We shall now give an example of the Application of
the Signs -h and — to Time, which is of supreme importance in
elucidating the Theory of Credit
Suppose this question were asked —
A father^ 8 age is 40, and hie son's 15 : when was the father
twice the age of his son ?
Let X be the number of years hefore the present time when
the father was twice the age of his son
Then 40 — or = 2 (\h — x)
or :z? = — 10
What does this Negative answer mean ?
It means that the father never was twice the age of his son
in time past, which is taken as Positive in the question : the
epoch or event of the father being twice the age of his son is to
be found in Time opposite to the past: that is to say, in Time
future: The father was not twice the age of his son ten years
ago : but he will be twice as old as his son ten years Iiefice : as is
very clear : because ten years ?ience the father will be 50 and the
son 25
Hence, if any event which has happened in Time past is
Positive : the same event, if it is to happen in Time future is
Negative
Thus, if a Product or Profit which ?ias been realised in Time
past is distinguished as Positive : then a Product or Profit which
is to he produced in Time future is Negative
Hence, if any Economic Quantity, or Capital, of any form
produces Profits on a continuous series : the Profits which have
been produced in Time past may be distinguished as Positive :
and ihe Profits which are to be produced in Time future may be
distinguished as Negative
SIGNS APPLIED TO OPERATIONS 229
And, consequently, the Bight to the Profits already realised
in time past may be distinguished by the sign +, and termed
Positive : and the Right to the Profits which are to be produced
in Time future may be distinguished by the sign — , and termed
Negative
And the total Value of the Economic Quantity, or the Capital,
comprehends both the Right to the profits already realised in the
past: and also the Right to the profits to be produced in the
future : or both the Positive Bight and the Negative Bight
These doctrines apply to all Economic Quantities, or Capital,
producing a continuous series of profits, *.«., all Economic
Quantities of the form of an Annuity : such as the land : personal
Credit: Shares in Commercial Companies: the Funds: Copy-
rights : Patents : the Goodwill of a business : tolls : ferries, &c.
Examples of the Algebraical Signs applied to Operations
21. The same signs + and — are also applied to any
Operations whatever of an Inverse, Opposite and Conti-ary
nature: no matter what the Inverseness, Opposition, or Con-
trariety may consist in
Thus, to Add and to Substract : to Pay and to Receive : to
Do and Undo : to Build up and to Pull down : to Admit and to
Deny : to Grant and to Refuse : to Expand and to Contract :
and the innumerable verbs denoting opposite or contrary opera-
tions which every reader can supply for himself: are all
distinguished by the contrary or opposite signs + and —
And, as in the most general way possible, any Operations
whatever which can be conceived of an Inverse, Opposite, or
Contrary nature, are distinguished by the signs -f- and — : to
Create or to call into existence out of the Absolute Nothing:
and to Cancel, Annihilate, or to Decreate into the Absolute
Nothing : are operations of an Inverse, Opposite, or Contrary nature
Hence, if to Create or call into existence out of the Absolute
Nothing be denoted by the Positive sign + ; to Cancel,
Annihilate, or to Decreate into the Absolute Nothing, will be
denoted by the Negative sign —
+ ■
230 THEORY OF CREDIT
Now, in the purchase of Money, or Goods on Credit, an
Obligation is Created out of the Absolute Nothing : and on the
Payment of the Debt the Obligation is Cancelled, Annihilated,
and Decreated into the Absolute Nothing
Hence, to Create an Obligation, may be denoted by the symbol
+ £100
. — £100
And to Cancel, Annihilate, or Decreate an Obligation may
be denoted by the symbol
+ £100
— £100
Now, when an Obligation is Created, the Creditor's Eight of
action is Created out of the Absolute Nothing
But as has been shown, in every system of jurisprudence in
the world a Eight of action is Pecunia^ Res^ Bonum, Merx:
XP'^iH^ Trpdyfia, oucrta, oIkos, &c. : goods, chattels, merchandise,
a vendible commodity : its Value is measured in money : because
it will be paid at maturity : it may be bought and sold : and,
therefore, it is Wealth
Hence it is manifest that Goods, Chattels, Merchandise,
Wealth has been Created out of the Absolute Nothing
And when the Obligation is paid, satisfied, discharged and
extinguished, this Eight of action ceases to exist : it is Cancelled,
Annihilated, and Decreated into the Absolute Nothing
Hence Goods, Chattels, Commodities, Merchandise, Wealth,
can be created out of the Absolute Nothing : and again Decreated
into the Absolute Nothing from which it came: to the utter
confusion of all the materialistic philosophers from Kapila to the
present day
The superlative importance of these considerations will appear
when we come to exhibit the mechanism and practical effects of
the great system of Banking
Jurists also use the terms Positive and Negative to denote
Opposition
22. Jurists, also, as well as mathematicians, very commonly
use the terms Positive and Negative to denote Opposition
DEBTS AS NEGATIVE QUANTITIES 231
Thus, Ortolan uses the terms Positive Rights to denote Rights
to Acts, and Negative Rights to denote Rights to Forbearances
Jurists class Servitudes as Positive and Negative : or, those
which consist in the Right to use the given subject in a given
way: and those which consist in the Duty of the owner of a given
subject to allow it to be used in a given way
Ortolan calls the Omission or Refusal on the part of a person
to act or do something a Negative fact
So Austin speaks of Positive and Negative Wrongs : or
Wrongs of Cb/»-mission and 0- mission
In Parliamentary language, a Bill which is thrown out is said
to pass in the Negative
In its relation to Right, a Duty is Negative : but Duties
themselves are Positive and Negative : as there is the Duty to do
something, and the Duty to abstain from doing something. Thus,
we have, as it were, a Negative sign within a Negative sign : which
we shall hereafter find to be the case in Economics
So Active and Passive are distinguished as Positive and
Negative : Rights and Duties are frequently termed Active or
Positive Rights, and Passive or Negative Rights
Thus, if the Right to demand £100 be denoted by (+ £100) :
the Duty to pay £100 will be denoted by (— £100): without
any reference to any specific £100 in cash
But not only Mathematicians and Jurists, but also purely
literary writers, constantly adopt the same usage
Thus, Bishop Stubbs says of Edward II.—" His faults are
quite as much Negative as Positive : his character is not so much
vicious as devoid of virtue "
And any reader of attention will observe that such usage is of
constant occurrence
On the true Meaning of saying that Debts are Negative
Quantities
23. It has been shown that mathematicians have erred in
their application of the term Negative to Debts because they
interpret the sign — as aifecting the Property of the Debtor
232 THEORY OF CREDIT
But Jurists also term Debts Negative Quantities : but they
apply the sign — as aflfecting the Person of the Debtor. And
then the meaning of the term becomes perfectly clear
An Obligation consists of two parts —
1. The Creditor's Bight to Demand
2. The Debtor's Duty to Pay
These two Quantities are Inverse, Opposite, or Contrary to
each other : the first is Active or Positive : the second is Passive
or Negative
Hence the Creditor's Personal Right of action is the Positive
Quantity : and the Debtor's Personal Duty to pay is the Negative
Quantity
Hence if a person has £500 at his banker's, and is also
bound to pay £50 at some given future time : and therefore his
Property may be stated as £500 — £50 : it is not to be read as
if he had only £450 at his banker's : but it is to be read in this
way— he possesses £500, but coupled with the Duty to pay £50
at some given time
And the same is true even if the Debt be due and payable on
demand : because he retains the actual property in the money
until the Creditor brings him his Right of action : and he
voluntarily agrees to buy up the Right of action against himself,
by giving £50 in exchange
Hence, in Economics, the symbol (+£100) always denotes
the Right to Money : or the Right to demand money : such as
Bank Notes, Bills of Exchange, or other securities : and the
symbol ( — £100), always denotes the Personal Duty to pay
money
We now clearly see the meaning of saying that Money is a
Positive Quantity and Debt is a Negative Quantity : because
Money denotes a Right and Debt denotes a Duty
And this exactly corresponds with the usual Algebraical
doctrine that Quantities passing through change their sign.
Because, when a person has spent all his money : and therefore
his property is : and then runs into Debt ; he has exhausted all
his Right and has incurred a Duty
MONEY AND CREDIT 233
So, when a man's property is said to be £100 less than nothing,
it means that he has no money, and is under the Duty to pay
£100
It is now seen how necessary it is to observe the double mean-
ing of the word Debt in Law and common usage
When a Debt is termed "Goods and Chattels," ** Merchandise,"
or ** Commodities " or ** Wealth," it means the Creditor's Bight
of action
When a Debt is termed a ** Negative " Quantity, it mesufs t^g^^ ^
Debtor's Duty to pay j ^,^ '' \
And, as the Inverse, Opposite, or Contrary Quantities
Obligation are created together : can only exist together :
vanish together : they are exactly analogous to Polar Forces
If Money be termed Positive Capital, Credit may be termed
Negative Capital
24. A merchant's Wealth or Purchasing Power consists of
his Money, his Rights to demand money — i,e,, any Bank Notes,
Bills of Exchange, or other Securities he may possess : and his
Credit — »*.«., his Right to the future products of his industry
If he buys goods with his Money and sells them with a profit^
he first replaces the sum he has expended : and the surplus is his
Profit
If he buys goods with his Credit, he creates a Debt against
himself : when he sells the goods, he first discharges the Debt he
has incurred : and the surplus is his Profit
In either case, his Profit consists in the excess of his Property
at the end of the operation, above what it was at the beginning
If he buys with Money, he makes Capital of the realised
Profits of the Past : if he buys with Credit, he makes Capital of
\ the expected Profits of the Future
In each case he makes a Profit : hence, by the definition,
Money and Credit are equally Capital : but they are Inverse or
Opposite to each other : hence, if Money be termed Positive
Capital, Credit may be termed Negative Capital
234 THEOUY OF CREDIT
By a somewhat curioas coincidence of thought, the early
Algebraists, not appi*ehending the meaning of the Negative Boots
of Equations, called them fictitious roots (fief (s radices) : while they
called the Positive Roots, true roots (vercR radices )i
Thus, in the problem we gave of the father's and son's ages, the
answer came out Negative : which merely showed that the
question should have been stated in the Inverse or Opposite way
to what it was done : it should have been asked when the father's
age would he twice that of his son : instead of when it had been.
And, therefore, as the Positive sign in that equation meant past
time the Negative sign mo^nt future time. But this root, though
Negative, is as real a root as the Positive one
The Boot of an equation is any Quantity whatever which
satisfies the terms of the equation : hence, a Negative Quantity
which satisfies the terms of an equation, is as much a Real root
as a Positive Quantity
So, in a similar way, many writers, seeing clearly the effects of
Credit, call Money real Capital, and Credit fictitious Capital
But the truth is, that like as the Negative root of the equation
is equally real with the Positive one, Credit which is certain of
being paid is exactly of the same value as gold itself : as Mill has
expressly pointed out
Money is the Property in gold already acquired : and Credit is
the Property in gold to be acquired. Therefore, Credit is Inverse
or Opposite to Money : by using Money the trader makes Capital
of the realised profits of the past : by using his Credit he makes
Capital of the expected profits of the future
The fact is, that when we adopt Exchangeability as the sole
essence and principle of Wealth, the whole difficulty vanishes
TRANSFER OF CREDITS 235
Section II
On the Transfer of Credits or Debts
26. Rights of action, Credits, or Debts are now clearly shown
to be the Name of a certain species of merchandise, goods and
chattels, or commodities : and they can be bought and sold like
any other merchandise or commodities
When it is seen that a Bank Note passes from hand to hand
like money, it might perhaps be supposed that any Debts might
be sold and transferred with equal facility. This, however, is a
great error. There is very considerable subtlety regarding the
sale of Debts : and it was only by very slow and gradual degrees
that they have become freely saleable
If it were asked what discovery has most deeply affected the
fortunes of the human race, it might probably be said with truth
— The discovery that Debts are saleable commodities
When Daniel Webster said that Credit had done more, a
thousand times, to enrich nations than all the mines of all the
world : he meant that Debts are saleable commodities, or mer-
chandise : that they may be used as Money : and that they
produce all the effects of Money
We must now trace the origin and progress of the power of
selling Debts : and place this branch of Mercantile Law on solid
foundations
On Property held in Contract : or on Jura in Personam
26. It has been shown in the fii"st chapter that Property or
Rights are of two species
236 THKORY or CREDIT
1. The Property or Right to a specific chattel: termed in
Roman Law a Jus in rem, or in re : without being iielated to
any one else. This kind of Right is also called Dominium,
When a person has such a sole and exclusive Right in any
chattel, he may sell or transfer it to anyone else at his own
good will and pleasure : and without asking the consent of any
one else
Money, cattle, timber, corn, &c., are subject to this kind
of Property: and hence, the proprietor of such chattels may
freely alienate, sell, donate, or transfer them to anyone else he
pleases
2. Property or Rights held in Contract or Obligation :
called in Roman Law a Jus in Personam: or a Jus ad
rem {acquirmdam) : where a person has a Right, not to any
specific thing: but only against a Person to compel him to
Pay or Do something
A simple example of this kind of Property or Right is
the Contract, or Obligation, of Debt: where one person, the
Creditor, has the Right to demand a sum of money from
some pei'son, the Debtor: or has the Right to compel him to
Do something. In such a case the Creditor has no right to
any specific sum of money or chattel in the Debtor's possession.
And the Creditor's Right against the Debtor exists whether he
has any money or not : and equally the Debtor's Duty to pay
exists whether he has any money to pay or not. In fact, the
Contract, or Obligation, is a purely abstract relation existing
between the two parties, without reference to any specific money
or other chattel
The former kind of Rights are called Real Bights or Cor-
poreal Property: because they are the Rights to certain
specific things or chattels. The latter are called Personal
Bights, because they are mere abstract Rights against a
Person: and as the Person is always specified and definite,
they are also called Nominate Rights: but as they are wholly
severed from any specific chattels, they are one species of
Incorporeal property
PROPERTT HELD IN CONTRACT 237
Property or Bights held in Contract, or Obligation^ are of
Two kinds
27. But Property or Rights held ia Contract, or Obligation,
are of two kinds —
1. Where there is a Right to demand on one side and the
Duty to pay or do on the other: such as the relation between
Debtor and Creditor ; or landlord and tenant in modern times
Such a relation is termed a Unilateral Contract
2. Where each party to the Contract has the Right to demand
and also the Duty to perform something : such as the NexuSy or
Obligation, between landlord and tenant in feudal law : or that
between Master and Servant at the present time
Such a relation between two parties is termed a Bilateral, or
Synallagmatic, Contract
Formerly it was held universally, that when Property was held
in Contract of either sort. Unilateral or Bilateral, neither party
conld substitute another person for himself without the consent of
the other party to the Contract
This rule must evidently hold good in all Bilateral Contracts.
When one person agrees to accept another person to perform the
Duty, he of course believes that that person can perform the duty.
But he cannot be compelled to accept another person to perform
that Duty without his own consent : because he cannot be sure that
that other person is able to perform the Duty. Neither, if a
person has agreed to perform a duty to another, can he be
compelled to perform it to some one else, without his own
consent
Thus, so long as the feudal law retained its pristine rigor,
neither the Lord nor the Vassal could substitute any one else for
himself, without the consent of the other party. Each of the
parties had Duties to perform : the Vassal to render true and
loyal service : and the Lord to render due protection and defence.
And neither party could attorn the other^, or turn him over, to
any one else without his own consent
^Bracton, 2, 35, 13. Litt., 551, 567, 668
238 THEORY OF CREDIT
As Sir Martia Wright says* — "As the fendatory could not
aliene the feud without the consent of the Lord : so neither conid
the Lord aliene, or sell, or transfer, his seignorj or superiority to
another without the consent of the feudatory. For the obliga-
tions of the superior and inferior were mutual and reciprocal: the
feudatory was really as much interested in the conduct and ability
of the Lord, as the Lord was in the quaUfications and ability of
his feudatory. And, as the Lord could not aliene, so neither
could he exchange, mortgage, or otherwise dispose of his seignory
without the consent of his Vassal. Again, as the Vassal or feuda-
tory could not aliene, so neither could he devise or dispose of the
feud by will, or by any means (when the feuds were become
hereditary) prevent or vary the feudal course of succession "
So, in the case of master and servant at the present day. A
master cannot attorn or transfer his household to another master
without their own consent, as if they were cattle or slaves. Neither
can a servant substitute any one else for himself, without his
master's consent
So, if a person contracts to do any work for another, he cannot
substitute another person for himself, without the consent of the
other party to the contract
The same principle formerly held good when the Contract was
Unilateral : as in the case of Creditor and Debtor. The Creditor
could not transfer his Right of action against the Debtor to any
one else, without his consent : because the Debtor never agreed to
pay any one except his own Creditor. And the Creditor had no
power to stipulate that the Debtor should pay any Transferee of
the Debt
It is a rule of law, as well as of common sense, that no person
can be made a party to a contract without his own consent:
and no one can stipulate for another without his authority
Thus the Digest says — " Alteri stipulari nemo potest "
*' No one can stipulate for another "
Unless, therefore, the Debtor had given authority to his
Creditor to transfer his Right, the Creditor had no power to
guarantee his Transferee that the Debtor should pay him
• Chi Tenures^ p., 30
PROPERTY HELD IN CONTRACT 239
Accordingly, both in Roman and English Law, for a long
period, the Creditor could not transfer his Right of action against
his Debtor without his consent, so as to enable the Transferee to
sue the Debtor in his own name
But both in Roman and Engh'sh Law the Creditor might
transfer his Right with the consent of the Debtor. If the Debtor
consented, the Creditor, the Debtor, and the Tmnsferee, might
meet together : and the Creditor might transfer his Right to the
Transferee : the Debtor might agree to pay the Transferee.^ In
sucli a case the Transferee acquired a Right of action against the
Debtor. The release of his duty to pay his own Creditor was
the consideration for his promise to pay the Transferee. The
Debtor was released from his Debt to his own Creditor: and
the Creditor was relejised from his Debt to the Transferee
This transaction may be regarded in two lights : either as the
mere transfer of the Creditor's Riarht to the Transferee: or as
the creation of a new contract which cancelled, discharged and
extinguished the former one. In the latter view it was what is
called in Roman Law a Novatio
But, nevertheless, though it may be true in theory that a
Creditor cannot transfer his Right of action without the consent
of the Debtor, yet, in the progress of civilisation and mercantile
ideas, the Creditor soon begins to insist upon the power of trans-
fering his Right of action, like any other property. And there
is very good reason for this : because in the Contract or Obliga-
tion of Debt there is manifestly a strong distinction between the
two parties, the Creditor and the Debtor
The Debtor cannot substitute a new Debtor for himself,
because the Creditor may not have the means of knowing the
solvency of the substituted Debtor : as, for instance, no Debtor
can compel his Creditor to accept payment of a Debt- in the notes
of a country banker : or in another person's cheque
Therefore, by the very nature of things, the consent of the
Creditor is necessary to the substitution of a new Debtor
* Gains, ii, 38
240 THEORY OF CREDIT
But the case of the Debix)r is different. If a person really
owes a debt and has the means of paying it, it cannot make the
sh'ghtest difference to him whether he pays it to A or to B : so
long as he can get a discharge for it : and is not liable to pay it
twice over
Hence it is evident that while it might seriously prejudice a
Creditor to have a new Debtor assigned to him, of whom he might
know nothing : the assignment of a new Creditor can be no real
prejudice to the Debtor
Both in Rome and England Creditors insisted upon selling
their Rights : and certain legal devices were adopted to enable
the Transferee to obtain payment from the Debtor, even although
he had not consented to the transfer. Till at last Creditors in
both countries established their right to do so without the consent
of the Debtor
Thus, at last, after centuries of conflict, Credits or Debts have
come to be as freely transferable as Money itself : and, in fact,
they are for all practical purposes, in all respects equivalent to an
equal increase of Money. And thus they have become both Jura
in Personam and Jura in re. And it is this absolute freedom
in the saleability of Debts, which has been the principal cause of
the stupendous progress and magnitude of modern commerce
On the Transfer of Credits or Debts in Roman Law
28. It has just been shown that originally, in the Unilateral
Contract between Creditor and Debtor, the Creditor could not sell
or transfer his Debt, or Right of action, to any one else, so as to
enable the Transferee to sue the Debtor without his own consent
The Transferee could not sue the Debtor, because he never
made any promise that he would pay the Transferee : and thus
there was no privity of contract between them : and the Tmnsferee
could make no engagement that the Debtor should pay the Trans-
feree : because no person can stipulate, or make a contract for
another person, without his consent
If, however, the Debtor agreed that his Creditor might transfer
his Right of action, it might be done. The Debt, being a mere
abstract Right, was not capable of being transferred by manual
delivery : but it could be transferred by oral consent
TRANSFER OF DEBTS IN ROMAN LAW 241
The Creditor, the Debtor, and the Tmnsferee met together^ :
and the Creditor, with the consent of the Debtor, transferred his
debt to the Transferee by word of month. The Debtor agreed by
word of mouth to pay the Transferee : the Creditor then, by word of
mouth, released the Debtor from his debt to him : and the Transferee
by word of mouth, released the Creditor from his debt to him
A new contract was created, which cancelled and extinguished
the two preceding ones : and was therefore called Novatio : and
the assignment of the Debtor to the Transferee was termed
Delegatio. When this solemn stipulation was completed, the
Transferee might sue the Debtor in his own name : because there
was now a privity of contract between them
As the commercial spirit, however, increased at Rome, Creditors
began to perceive that Debts, or Rights of action, might be used
in commerce like money : and they soon began to devise means
of transferring them, even without the consent of their Debtor.
Accordingly, though they could not devest themselves of the legal
estate in their debts so as to enable the Transferee to sue the
Debtor in his own name, in course of time certain legal devices
were adopted, so as to enable the Transferee in an indirect way to
recover the debt from the Debtor, even though he had not given
his consent to the transfer of his debt
We have now to trace the steps in Roman Law by which a
Creditor came at last to have the absolute legal Right to sell or
transfer his debt, without the consent or the knowledge, or even
against the consent, of the Debtor : and the Transferee acquired
the right to sue the Debtor in his own name
The early simplicity of the Code of the XII. Tables knew
nothing of Trustees or Attornies. Every man was either the
absolute proprietor of a thing, or he was not.i He who possessed
the legal estate was termed Dominus ex jure Quiritium, or the pro*
prietor by the common law of the Romans. It knew nothing of
double or subordinate rights. The Code of the XII. Tables
allowed no man to sue in the nam^ of another in private cases.^
^GkUtis 11., 3S
^Gaius IV., 82 ; Digest, 4, 17, 123 ; DasiL II. 3, 123
K
242 THEORY OF CREDIT
He alone who was Dominus ex jure Quiritium might sue, and that
in person. And as no man could sue another unless there was
some bond, relation, or nexus between them : the Transferee of
the debt could not sue the Debtor, because there was no privity of
contract between them
The Code of the XII. Tables was maintained in all its strict-
ness for about 277 years. During this period the forms of writs
of action were defined with the greatest strictness. They were
called Legis Acitones, or, as we might say, Common Law writs:
and as long as these lasted no one could sue on behalf of another,
or in the name of another. Consequently, so far as we can under-
stand, the Transferee of a debt could not in any way, direct or
indirect, maintain an action against the Debtor
But, in the progress of time, new rights, new interests, new
wants and new ideas, grew up : and a great equitable jurisdiction
came into existence to meet the new requirements. The supreme
judicial magistrates, the City and the Foreign Praetors were
clothed with the power Adjuvandi vel mpplendi: vel corrigendi:
juris civilis gratia, propter vtilitatem puhlicam. The Romans had
so deep a reverence for their Code, which Cicero declares to
contain in one chapter more utility than all the libraries of the
philosophers,^ that the Praetors were not allowed actually to abolish
any of its laws ; but only to supply their defects, and to extend
their meaning. But new rights and new interests had grown up
which were not capable of being protected directly by law, unless
by the aotual repeal of some of the provisions of the Civil Code
Among these new rights were Equitable Interests. One
person might be possessed of the legal estate in certain things,
but permit another to enjoy their use and profit: without
undergoing the formal solemnity of the transfer by maiicipation
or the cesdo in jure. The original owner, therefore, possessed
the nudum jus Quiritium, or the mere legal estate, while the
grantee possessed the profitable, equitable, or as the mediaeval
jurists termed.it, the honitarian use. But the Code of the XII»
Tables gave no right pf action to the equitable owner
' De Oratore, I., 4
TRANSFER OF DEBTS IN ROMAN LAW 243
Thus, if a Creditor transferred his debt, or right of action,
without the consent of the debtor, he alone possessed the nudum
jus Quiritiumy or the legal estate in it: but the Transferee
possessed the equitable right to it, but he had no right of action
by the Code of the XII. Tables
In order to protect these Equitable Interests, which had
greatly increased and multiplied in the course of time, without
directly contravening the fundamental laws of the XII. Tables,
the Praetors gradually created the great system of Legal Fictions :
and these fictions were soon applied to protect the Equitable
Rights of the Transferees of debts
About the year 577 A.u.c, or 176 B.C., the Lex JShuiia
abolished the old Legis actiones, which were not part of the
XII. Tables, but only a series of writs framed by the magis-
trates so as to be adapted to them. New forms of writs
were prepared under the authority of the Pi-aetors, called
Formula: and these were adopted and extended by two Leges
Juli<B^
By these new formulm parties were allowed to be represented
by Cognitores or Procuratores : that is by Attornies : who were
allowed to sue on behalf of their clients. The Transferee
of the debt was then allowed to sue as the Gognitor or Procurator
of the Transferor.* Gains gives the formula in such a case^
The Praetor could only grant an actio directa or vulgaris to
the original Creditor : but he could grant an a/^ti^ utilis or fictitia
to the Transferee of the debt*
When a Creditor sold his Right of action, he was said cedere
or mandare actionem^
The Transferee was called Procurator in rem suam^ : he was
acknowledged as the real principal : si in rem suam datus sit
procurator, loco domini habetur: his mandate could not be revoked :
and he owed no account to his principal'
» Gains, ix., 30 * QaiuSj ii., 39 » Oaius, iv., 86
*Gaiu8y iu., 32, 81 : iv., 34. Digest, ii., 14 : 16. Cod, It., 10 : 2, xxix.. 5 : 7, 8
^Digest, TV., SS: 5, xvi., 3:2. xvii., 1. xix., 1:31. xliv., 7:7. xlvi., 3:76
^Digest, iii., 30. xvii., 1 : 8, 10. xliv., 4 : 4, 18, 24
^ Cod., iy., 10: 1
R 2
244 THEORY OF CREDIT
Such was the state of the law regarding the sale or transfer of
debts in the time of Gaius, who is generally supposed to have
written his institutes in the time of the Antonines. They were
the text book of Roman Law throughout the whole empire when
the Romans abandoned Britain : and many high authorities hold
that they were one of the sources and origins of the Common Law
of England. And the Comuion Law of England with regard to
the sale or transfer of Debts is exactly that stated by Gains
Soon after the time of Gaius, the Emperor Alexander Severus,
acting probably on the advice of Ulpian, in the year 224, a.d.,
published a Constitution by which the absolute freedom of the
sale of Debts without the knowledge or consent of the Debtor was
recognised and allowed : and this was repeated and confirmed iu
the Basilica
Digest, xviii., 4: 17 — "Nomina eorum qui sub conditione vel
in diem debent et emere et vendere solemus. Ea enim res est quae
emi et venire potest "
" We are accustomed to buy and sell debts payable on a certain
event and on a certain day. For that is Wealth which can be
bought and sold "
So, also, '* Omnium rerum quas quis habere vel possidere, vel
persequi potest venditio recte fit "
^* All things which one may have or possess^ or has the right
to sue for, may be lawfully sold
So, also, " Nomina quoque in diem vel sub conditione contracta
veneunt "
'^ Debts contracted to be paid on a certain day, or on a certain
condition may be sold "
Cod., iv., 39 : 3 — "Nominis venditio etiam ignorantevel invito
eo ad versus quem actioues mandantur, contrahi solet "
" It is usual to sell a Debt without the knotvledge of and even
against the consent of the Debtor "
It was declared to be lawful to sell all actions real as well as
personal
Cod.yiv., 39: 9 — "Certi et indebitati juris est, ad similitu-
dinem ejus qui personalem redemerit actionem, et utiliter earn
movere suo nomine conceditur, etiam eum qui in rem actiones
comparaverit,, eadem uti posse facultate "
■«aa
TRANSFER OF DEBTS IN ROMAN LAW
245
^^It is clear and undoubted law, that just as he who has bought
a personal action may sue out a writ in his own name : so he who
has bought a real action has the same power "
In the time of Gains, the Transferee of a debt could only sue
as the Attorney of the Transferor : as he was obliged to allege the
legal estate, or jus Quiritium, of the Transferor : but Justinian
took away the necessity for this, and abolished the nudum jus
Quiritium, as an antiquated relic of old Roman law, which was
only an enigma which puzzled law students^: and then the
Transferee could sue in his own name
Cod., iv., 89 : 7 — " Ordinarium visum est post nominis vendi-
tionem uti emptori (sicut responsum est) vel ipsi creditor!
postulanti dands actiones "
" It is seen that it is usual, after the sale of a debt, to grant a
writ either on the demand of the buyer {as has been decided), or of
the Creditor himself ^^
Thus, at length, Debts were completely emancipated from the
general rules afifecting property held in contract : they were made
as freely saleable as any material chattels: and they were thus
removed from the category of Property held in Contract to that
of Property held in Dominion : and thus Debts became both Jura
in personam and Jura in re
These laws regarding the sale or transfer of debts were con-
firmed in the Basilica
" Basil., xix., 4, 16 — " koX oti ra viro ijfUpav, Kai rd viro atjpcoriv
)(p€a TTiTrpdcTKovTat^*
*^ Debts payable on a certain day and on a certain event may be sold"
Basil., xix., 4, 68-
((
\ A
Kat OTt TO TTOVpOV )(p€Oi VTTO aipCOTlV -TTtTT/ja-
OTKCTOi, Kat vwo aXpto'iv trovpiDi"
" A simple debt may be bought conditionally, and a conditiojial
debt simply "
Basil., xix., 4, 27 — " 17 tov ypafJifuiTtlov irpda-i^ Koi ayioovvroi
Ktu iA,rj Povkop.kvov iK€tvov, Kaff ov €K\Q}povvTai at aywyat, Svvarai
a-wicrracrOai,^^
»CVM?.,vii., 25
246 THEORY OF CREDIT
** A debt may he sold mtlwut the knowledge and even against
the eoneent of the Debtor "
Thus, the iiitei'estB of oommeroe effected the perfect freedom
of the sale of Debts. Both by the Digest which was the Code of the
Western Empire, aad the Basilica which was the Code of the
Eastern Empire, Debts were declared to be as freely saleable and
transferable as Money or any other chattel
Thus, Azo, one of the legal luminaries on the revival of
juridical studies in the West says —
''De Actionibus autem venditis sciendum est quod omnes
actiones vendi possunt, sive sunt puras, sive conditionales, sive
reales, sive Personales *'
*^ But with respect to the sale of actions it must be understood
that all Rights of action, whether simple or conditional, whether
real or Personal, may be sold "
Nevertheless, although it was the general law of the empire
that all debts might be freely sold, it was found to work so much
hardship, that many cities in the Middle Ages passed local laws
prohibiting the sale of Debts within their jurisdiction
This investigation clears up a difficulty which has puzzled
some modern writers. The earliest Bills of Exchange extant,
which are preserved in the archives of Venice, contain; no words
of negotiability, and yet we know as a fact that they were
negotiated. Several writers have endeavoured to discover when
Bills of Exchange were made negotiable. Some have attributed it
to Cardinal Eichelieu. But all doubts have now been cleared up.
Bills of Exchange required no words of negotiability to make
them saleable: they were so by the general mercantile law of
Europe
This also explains a fundamental distinction between the
Common Law of England and the Common Law of Scotland,
with respect to Bills of Exchange. By the Common Law of
England, unless a Bill of Exchange is drawn payable to '' order"
TRANSFER OF DEBTS IN ENGLISH LAW 247
or to ** bearer : " that is, it is made transferable by the consent
of the Debtor expressed on its face ; it cannot be transferred so
as to enable the Transferee to sue the acceptor in his own name.
But by the Common Law of Scotland a Bill of Exchange requires
no words of negotiability to make it transferable by the lex loci
coniracfus : a Scotch Bill is negotiable in England without any
words of negotiability. Moreover, by the law of Scotland, a
Debtor is bound to accept a bill drawn upon him by his Creditor,
and is liable to an action for non-acceptance. This, however, is
not the case in England : a Debtor in England is not bound to
accept a bill drawn upon him by his Creditor. And this distinc-
tion has been preserved and confirmed by the Bills of Exchange
Act of 1882. And the reason of this difference is that the Law
of the Pandects and the Basilica is the Common Law of Scotland:
while the Common Law of England is the Law of Grains
Equity, however, always adopted the Law of the Pandects,
which allowed the free sale of debts : and consequently, though
the Transferee of a Bill of Exchange which contained no words
of negotiability could not maintain an action at Law against the
acceptor, he could always sue him in Equity, in case of need.
But the Supreme Court of Judicature Act of 1873 enacts that in
all cases in which the rules of Equity conflict with those of
Common Law the rules of Equity shall prevail: consequently,
Bills of Exchange are now transferable by their very nature,
without any words of negotiability
0)1 the Rules o/" English Equity and Common Law as to the
Transfer 0/ Credits or Debts
29. English Equity from its first institution adopted the
entire doctrine of the Pandects and the Basilica relating to the
transfer of Debts. A Creditor had always the right to transfer
his Debt without the knowledge or consent of his Debtor, and the
Transferee had always the right to sue him in Equity, if need be
But at the time the Romans left Britain in the beginning of
the fifth century Gains was the text-book of law throughout the
Empire, and the Common Law of England with respect to the
transfer of Debts was exactly as set forth by Gaius
248 THEORY OF CRKDIT
If the Debt was in a mere abstract form and not recorded on
any material, the Creditor, the Debtor, and the Transferee mij]:ht
meet together: with the consent of the Debtor the Creditor
might transfer his Debt to the Transferee, and then the Trans-
feree might sue the Debtor, because there was now a privity of
contract between them*
But in accordance with the early law of Rome a Creditor
conld not transfer his Debt to a Transferee without the consent
of the Debtor so as to enable the Transferee to sue the Debtor,
because there was no privity of contract between them : and the
Creditor had no power to stipulate that the Debtor should
pay him
But as at Rome, in the progress of civilisation Creditors began
to claim the right of selling their debts without the consent of
their debtor, and devised a legal fiction to enable them to do so,
so the very same thing took place in England
At Rome the Transferee was allowed to sue as the attorney of
the Transferor, and to retain the proceeds for his own use : in
England as early as Henry VI. the Transferee was allowed to sue
in the name of the Transferor : or the Transferor sued as the
Trustee for the Transferee
And this continued to be the Common Law of England with
regard to the Transfer of Debts to which the Debtor had not
assented, up to the passing of the Supreme Court of Judicature
Act in 1873 : which swept away all the doctrines of Common
Law which conflicted with those of Equity
Thus the rule of Common Law that a Debt cannot be trans-
ferred without the consent of the Debtor was reduced to a fiction.
And some eminent Judges reared up under the supremacy of
Lord Mansfield maintained that the Courts of Common Law
might sweep away this absurd fiction and adopt the full doctrines
of Equity
Thus, in 1787, Ashhurst, J., said^ — "It is true that formerly
the Courts of Law did not take notice of an Equity or a Trust:
^Tathch V. Harris (3 T.R., 180). Fairlit v. Benton (8 B.C., 395). Waiianu v.
Everett (14 East, 682). Hodgson v. Anderstm (3 B. and C, 482), Lilly v.
Hays (6 A. and E., 648). Walker v. Mostron (9 M. and W., 411). Hamilton
Y. Spottiswoode (4 Exch., 200). Grijin v. Weatherby (L.R., 3 Q.B., 753)
* Winch T. Keely (T.R., 619)
TRANSFER OF DEBTS IN ENGLISH LAW 249
for Trusts are within the original jurisdiction of a Court of
Equity : but of late years it has been found productive of great
expense to send the parties to the other side of the Hall. Where-
ever this Court have seen the justice of the case has been clearly
with the Plaintiff, they have not turned him round upon this
objection. Then, if this Court will take notice of a Trust, why
not of an Equity ? "
In another well-known case, BuUer, J., who may be considered
as the adlatus of Lord Mansfield, said' — " It is laid down in our
old books that for avoiding maintenance, a chose-in-acfcion cannot
be assigned, or granted over to another (Co. Litt., 21i, a ; 266, a ;
2 Roll., 45 : 1 , 40). The good sense of that rule seems to me
to be very questionable : and, in early as well as in modem times,
it has been so explained away, that it remains at most only an
objection to the form of action in any case. In 2 Roll., Abr.,45
and 46, it is admitted that an Obligation or other deed may be
granted, so that the writing passes : but it is said that the grantee
cannot sue for it in his own name. If a third person be
permitted to acquire the interest in a Thing, whether he is to
bring the action in his own name or in the name of the grantor,
does not seem so me to afifect the question of maintenance. . ,
Courts of Equity from the earliest times thought the doctrine too
absurd for them to adopt, and therefore they always acted in
contradiction to it : and we shall soon see that Courts of Law
also altered their language on the subject very much. In
12 Mod., 554, the Court speaks of the assignment of an appren-
tice, or an assignment of a bond as things which are good
between the parties, and to which they must give their sanction
and act upon. So the assignment of a chose-iu-action has always
been held a good consideration for a promise After
these cases we may venture to say that the maxim was a bad one :
and that it proceeded on a foundation which fails. But still it
must be admitted that though the Courts of Law have gone the
length of taking notice of assignments of choses-in-action^ and of
acting on them, yet in many cases they have adhered to the
formal objection that the action shall be brought in the name of
the assignor, and not in the name of the assignee. I see no use
» Master v. Miller, (4 T.R.,.320)
250 THEORY OF CKEDIT
in preserving the shadaw when tlie subfitance is gone : and that
it is merely a shadow is apparent from the later cases in which
the Courts have taken care that it shall never work injustice. . .
But admitting that on account of this quaint maxim an action
cannot be maintained by an assignee of a chose-in'Oction in his
own name, it remains to be considered whether that objection
ever did liold, or ever can hold, in the case of a mercantile instru-
ment or transaction. The Law merchant is a system of Equity
founded on the rules of equity, and governed in all its parts by
plain justice and good faith. ... I can find no instance in
which the objection has prevailed in a mercantile case : and in
the two instances most universally in use it undoubtedly does not
hold : that is, in the case of Bills of Exchange and Policies of
Insurance, till the late Act was made requiring that the name ot
the person interested should be inserted in the Policy, the constant
course was to make the Policy in the name of the broker : and
yet the owner of the goods maintained an action upon it. Circu-
lation and the Transfer of property are the life and soul of trade,
and must not be checked in any instance/' and he then cited the
case of Fenfier v. Meares
In another case^ the same Judge said — " During the fifteen
years that I have sat on this bench, I have never known any case
which established a distinction between Courts of Equity and
Law on subjects of this kind. I have always thought it highly
injurious to the pubhc that different rules should pi-evail in the
different courts on the same mercantile case. My opinion has
been uniform on that subject. It sometimes indeed happens that
in questions of real property, Courts of Law find themselves
fettei'ed with rules from which they cannot depart, because they
are fixed and established rules : though equity may interpose, not
to contradict, but to correct, the strict and rigid rules of law.
But in mercantile questions no distinction ought to prevail. The
Mercantile Law of this country is founded on principles of
Equity : and when once a rule is established in that Court as a
rule of property, it ought to be adopted in a Court of Law "
These are indeed —
" Aurea dicta
Aurea perpetua semper dignissima vita "
' Tooke V. HoUingworth (5 T.R., 216)
TRANSFER OF DEBTS IN ENGLISH LAW 251
Though these eminent Judges gave it as their opinion that
the Courts of Law had it in their power and ought to adopt the
rules of Equity with regard to the Transfer of Debts, they never
had the courage to do so. And judges after judges complained of
the great scandal that in this mercantile country there were two
conflicting systems of jurisdiction in which the same mercantile
case would be decided in contrary ways. And it was over 80
years before this scandal was abolished by Law
But when an Obligation was created transferable by the
Obligor himself, the Courts of Law for 550 years unanimously
held that it might be transferred, and that the Assignee or
Transferee might sue the Obligor in his own name
Thus Bracton, the prince of English Jurists, writing about
1250, adopts the division of property into Coi'poreal, and In-
corporeal, and afterwards considers Obligations
He says^ — "We must consider in the first place what an
Obligation is, and how it is contracted : and through what words
and through what persons an Obhgation is acquired: and in
what way it is dissolved and got rid of : and in what way after it
has been dissolved it may be renewed : and how it may be Trans-
ferred to another party : and how one Obligation may be changed
into another "
And in describing the various methods by which an Obligation
is extinguished, he says^ — *' Likewise by Novation : as if the
Obligation has been transferred from one person to another who
has taken the Obligation upon himself. For by the intervention
of a new Person, a new Obligation arises, and the first is
extinguished by agreement : as when a person has taken upon
himself the Obh'gation of another "
It may be useful here to inform the lay reader, that in
technical English Law a "writing" means a Deed under
seal, or a Specialty : and that a mere modem simple writing is
classed under parol evidence. Also that in early English Law
only writings or deeds under seal were admissible in the Courts
of Common Law. Mere verbal contracts could only be sued upon
in the Ecclesiastical Courts, such as the Court of Chancery
* De leg. Ang.^ i., 12, 3
' De leg. Ang.^ iii., 2, 13
252 THEORY OF CREDIT
Hence, when the word Obligation occurs in early English
Law, it invariably means a Deed under Seal or a Specialty
And from 1292 to 1800, there is an unbroken series of decisions
in the Courts of Common Law, that the Transferee of an Obliga-
tion created transferable by the Obligor himself might sue the
Obligor upon it
In 1292 the Assignee of a Charter was allowed to have an
action
In 1368 (Y.B., 41, Edw. III., p. 27) three priests, Assignees
of John Bishop, of Hereford, brought an action against the
Abbot of T., for arrears of annuity which he had granted to the
grantee and his assigns. It was pleaded at the bar that Ghoaes-
in-action were not assignable at Common Law. But the Court
unanimously held that the Assignee might sue
In two cases, in Edward IV. (Y.B., 5, Edw. IV., long
quinto : p. 42., and Y.B., 21, Edw. IV., p. 20., c. 28.), it was
held that the Grantee of an annuity had the right to gi'ant
it over
In Baker v. Brook (Benloes, c. 55. Dyer 68, 1.) Brook, the
parson of Bosworth, granted an annuity to the Grantee and his
assigns during his lifetime. The grantee assigned it : and the
Assignee brought an action against the Grantor for arrears. It
was argued that it was against the very nature of an annuity to
be assignable over : and that it was a matter of common learning
that a chose-in-actlon could not be granted over by a private
person. But Montague, Chief Justice, said that the Court were
unanimously of opinion the count was good, and the assignee
might sue the grantor
And referring to this case Coke says^ — ** A writ of annuity is
a writ for the recovery of an annuity. An annuity is a yearly
payment of a sum of money granted to another in fee, for life, or
for years, charging the person of the grantor only. But, not only
the grantee, but his heir and his and their grantee also, shall have
a writ of annuity "
Thus, Coke expressly acknowledges that an Obligation made
transferable by the Obligor might be transferred: and this
doctrine was again affirmed in a case in his own reports
» Co: Litt: 144c.
TRANSFER OF DEBTS IN ENGLISH LAW 253
In Maund y. Gregory, (7 Co. Rep., 28, 1) in 1602, Gregory
had by deed granted a rent-charge for his life to one and his
assigns. The grantee assigned it over, and the assignee distrained
for arrears. It was resolved by the Court that a rent-charge, or
chose-in-actionj granted to one and his assigns may be assigned
over by the express words of the grantor who granted it to him
and his assigns, for modus et conveniio vincunt lef/em"
This doctrine was again affirmed in the Common Pleas in
Gerrard v. Boden, in 1628, {Hetlet/, 80). Boden had granted
an annaity to a person and his assignees ; Gerrard the assignee
sued him. It was argued that it was merely contrary to the
nature of an annuity to be assigned over to another : and that
it was common learning that a thing-in-action cannot be assigned
over: unless it be the grant of the king. But Hutton, J.,
said — *' We are agreed that the annuity may be granted over "
Thus, after it had been alleged at the bar for some hundreds
of years that choses-in-action could not be made assignable at
Common Law, and on every occssion the Court had decided
against it, this dogma disappeared for a time, and was never
heard of again till 1800, as we shall see
Not only obligations in the form of personal annuities which
are most usually recognised as choses-in-action were thus, by an
unbroken series of decisions, held to be transferable when made
so by the Obligor himself : but also all other kinds of Obligations,
which were not so generally recognised as choses-in-action were
also made alienable and transferable
A strict military feud was by its very essence and nature
inalienable, and such only are called proper feuds by feudal
writers. But gradually this rigor was relaxed, and feuds were
created alienable and saleable
Sir Martin Wright says ^ — " All feuds therefore that are sold
or bartered for any immediate or contracted equivalent : or are
granted free of all services : or in consideration of one or more
certain services (whether military or non-military), or upon a
cens : or rent : in lieu of services : and all such feuds as are by
express words in their creation or constitution, alienable, are
* On Tenures, p. 33
254 THEORY OF CREDIT
improper feuds : and are severally treated of by the feudists
under the head of feuda emtitia, franca, censnalia, emptitoria,
alienabilia, &c."
Thus, though a feud was not originally alienable, yet wherever
the grantor made and created it alienable by granting it to his
grantee and assigns, it was assignable, and the assignee might sne
In Mallory v. Symond (Y. B., 9, Edw. IL, p. 292, 443), the
assignee of a charter was found to have an action against the
gi*antor who granted it to the grantee and his assigns
It also became common for a lessor to grant leases to the
lessee and his assigns, and such leases were assignable
The original contract between Lord and Vassal was bilateral :
because it involved Rights and Duties on both sides : and con-
sequently the Lord could not alienate his seignory without the
consent of his vassal: he could not attorn or turn over the
homage or service of his vassal to another person against his will ;
and if the tenant refused to attorn the grant was void. Just as
a Creditor could not attorn his Debtor to another person without
his own consent. But if the vassal agreed to the transfer of the
seignory, he was said to attorn to the new seignor
But when internal peace and security were established, the
relation between Lord and Vassal gradually changed from a
bilateral to a unilateral contract. The vassal came to look to the
general law of the land for protection to his person and property,
instead of to his immediate Lord : and all the various services of
the vassal were reduced to the simple payment of Rent
Consequently, the relation between Lord and Vassal was re-
duced to the simple one between Creditor and Debtor : or that of
liandlord or Tenant at the present day
When the relation between Landlord and Tenant was reduced
to a simple unilateral contract, the same principle began to be
applied to it as had already been applied in Roman law to the
law of Creditor and Debtor. It was no real prejudice to the
Debtor to whom he paid his Debt : so long as he was not called
upon to pay it twice over. So it was no real prejudice to a tenant
to whom he paid his rent : so* long as he was not called upon to
pay it twice over. The doctrine of atTtornment came to be felt to
TRANSFER OF DEBTS IN ENGLISH LAW 255
be a burdensome restraint on the alienation of land : and several
methods were adopted to evade it. In all cases where the Statutes
of Wills and Uses applied, attornment was declared to be unne-
cessary. And many other cases are given in Corny n's Digest.
Attornment L
Between the time of Littleton and Coke a further step was
made: for in several cases if the tenant refused he might be
compelled to attorn^
At last the doctrine of attornment as regards grants and
conveyances was entirely swept away, and abolished by the Act,
Statute of Anne, 1705, c. 16, ss. 9, 10 : which was drawn by the
great Lord Somers : and estates m land were made freely trans-
ferable without the consent of the tenant
This Act of Anne is exactly parallel to the Statute or Consti-
tution of Alexander Severus, already mentioned, declaring that a
Creditor might freely sell his debt without the knowledge or even
against the consent of his Debtor
By these means, in the course of many centuries, a complete
revolution was effected in the law relating to estates or contracts
relating to land. Wliereas they were originally inalienable unless
specially created so: at the pi*esent day all estates in land are
freely alienable unless granted with an express stipulation to the
contrary : and even in many cases such a stipulation is void-
Bills Obligatory or pei*sonal Obligations were like all writings
at that period Deeds under seal, or specialties: and were no
doubt at first made only to the Creditor himself. But the same
principle began to be applied to them as were applied to all other
Obligations. Though, as far as we are aware, no evidence exists
to show when the practice began, Obligations to pay both in the
form of what in modern language are termed Bills of Exchange
and Promissory Notes, were drawn as Deeds under seal, or spe-
cialties, and made transferable to attorney or to assignees or to bearer
Obligations in both these forms were in current use in the City
of London in the reigns of Edward IV. and Henry VII., and
specimens of them are given in a following chapter. As they
•(7o. LiVf., 3155, 316a
^Stephens Blackst, i., 469
256 THEORY OF CREDIT
are given as commoa forms in these reigns, it follows that they
must have been long in use. It is somewhat remarkable that
there is no instance of any of these Obligations having come
before a Court of Law
The last instance of a Bill of Exchange drawn as a Deed under
seal that occurs in the reports is in 1680. During this century
it appears that merchants began to use simply written Bills of
Exchange in the modern form : and that Bills under seal and
signed Bills circulated concurrently in commerce : though it is
stated in the edition of ^^ Lea Termea de la Lei'' for 1707, that
merchants were only then establishing their rights to maintain
the same action upon signed bills as upon sealed bills. After
that the custom of sealing bills entirely died out
With the establishment of banking, bankers adopted the custom
of issuing their signed Promissory notes. These were treated as
Bills of Exchange, and in several cases bankers' notes payable to
bearer on demand were held to be perfectly legal and valid
instruments^
But soon a stmnge conflict of decisions arose : and in a series
of cases it was held that the " bearer " had no action against the
acceptor of a bill or the maker of note drawn payable to
" bearer " : that Promissory Notes were not within the custom of
merchants : and could not be declared upon as Bills of Exchange :
that they were illegal at Common Law : and that they could not
be sued upon in any form as instruments : though they might be
offered as evidence of a debt
In several cases it was held by the King's Bench, presided
over by Lord Holt, that a Promissory Note payable to bearer
could not be sued upon by the bearer^
^Shelden v. Bentley, 1681 (2 Show., 1601). HintorCs Casey 1681 (2 Show., 235).
Williams v. WtUiania, 1693 (Carth., 269). Lambert v. Oakea^ 1699 (1 Lord
Kaym., 443). Bromwich v. Loyd (2 Lutw., 1693)
« Hodges v. Stewart, 1691 (1 Salk., 125). Horton v. Coggs, 1691 (3 Lev., 299).
Nicholson t. Sedgwick, 1698 (1 Lord Raym., 18). Cogg's Case, 1699 (Comber,
406). Carter v. Palmer, 1701 (Comber, 406). Jordan v. Barloe, 1701
(3 Salk., 67)
TRANSFER OF DEBTS IN EXGLTSH LAW 257
Up to this time the legality of Promissory Notes made payable
to order had not been questioned : bat by an extraordinary
example of judicial finesse it was held that a note payable to
bearer gave no authority to the bearer to indorse it. The Courts
after allowing that the bearer might sue the maker in some cases,
at last reversed this opinion, and held that the bearer had no
action against the maker : but they held that the indorsee
might sue his indorser : because every indorsement is a new
drawing
Moreover, up to this time Promissory Notes had been usually
declared upon as Bills of Exchange : and in the legal phraseology
of the times, what in modern language is termed making a Note
was termed drawing a Bill : and the maker of the note was
termed the drawer
But in Glarhe v. Martin, 1703 (2 Ld. Raym., 787), Lord
Holt held that Promissory Notes in any form were illegal. In
this case a Promissory Note drawn payable to A. B. or order was
declared upon as a Bill of Exchange, as was then the usual prac-
tice : and had been admitted by Holt himself in several cases
But now he set his face against Promissory Notes in any
form. The report says — "But Holt, C. J., was Mis viribus
against the action, and said this Note could not be a Bill of
Exchange : that the maintaining these actions ' upon such Notes
were innovations upon the rules of the Common Law, and
that it amounted to setting a new sort of Specialty, unknown to
the Common Law, and invented in Lombard Street, which
attempted in these matters to give laws to Westminster Hall :
that the continuing to declare upon these Notes upon the custom
of merchants proceeded from obstinacy and opinionativeness."
And the whole Court agreed that Promissory Notes in any form
were illegal at Common Law
In Cutting v. Williams^ 1703 (7 Mod., 155), the Court
unanimously adhered to the decision in Clarke v. Martin, Holt
said that he had proposed it to all the judges whether a declara-
tion upon a Promissory Note could be supported : and they were
all of opinion that a declaration upon a Promissory Note upon
the custom of merchants was void, as it made a Note amount to a
Specialty
s
258 THEORY OF CREDIT
The last case is Buller v. Crips^ J 704 (6 Mod. 29). The
indorsee of a Note drawn payable to A. B., or order, brought an
action against the maker, or drawer, and declared upon it as a
Bill of Exchange within the custom of merchants. But Holt had
now decidedly put his foot down, and had drawn all the other
judges over to his opinion. He said — ** The Notes in question
are only the invention of the goldsmiths in Lombard Street, who
had a mind to make a law to bind all those who did deal with
them : and sure to allow such a Note to carry any lien with it,
were to turn a piece of paper, which in law is but evidence of a
parol contract, into a Specialty : and besides it would empower
one to assign that to another which he could not have himself:
for since he to whom this note was made could not have this action
how can his Assignee have it ? And these notes are not of the
nature of Bills of Exchange: for the reason of the custom of
Bills of Exchange is for the expedition of trade and its safety,
and likewise it hinders the exportation of money out of the
realm "
On a subsequent day Lord Holt said that he had desired to
speak with two of the most famous merchants in London to be
informed of the mighty ill consequences that it was pretended
would ensue by obstructing this course, and that they had told
him it was very frequent with them to take such notes: and that
they looked upon them as Bills of Exchange: and that they had
been used for a matter of thirty years: and that not only Notes,
but Bonds for money were transferred frequently, and indorsed as
Bills of Exchange
As the decision of Lord Holt and his Court that Promissory
Notes were illegal in any form whatever seemed unalterable, the
Act, Statute 1704, c. 9, was passed, which, having recited that it
had been held that notes in writing signed by the party who
makes the same, whereby such party promises to pay to any other
person or his order, any sum of money herein mentioned, are not
assignable or indorsable over within the custom of merchants:
and that neither the payee himself nor his indorsees could main-
tain an action on such Notes : such Notes made payable to any
person or to order or to bearer, should be placed in all respects
on the same footing as Inland Bills of Exchange
TRANSFER OF DEBTS IN ENGLISH LAW 259
Prom this period until the year 1868 these cases decided by
Lord Holt were held to be law, with one solitary exception :
and it was thenceforward supposed that it was the Statute of
Anne which first legalised Promissory Notes
Nevertheless, in Orant v. Vaxighan (1 Black, 485), Lord
Mansfield, and the Court of King's Bench, unanimously con-
demned them as erroneous. But, surprising as it may appear,
this case, decided by the highest mercantile authority of the day,
never attracted the slightest attention, and, it continued to be
held as law by all judges, and laid down in all text books of
Mercantile Law, that Promissory Notes are illegal at Common
Law, and that they were only first legalised by the Statute of
Anne
In Fmnerv. Meares, 1772 (2 W. Black., 1269), Meares had
granted a respondentia bond to Cox, assignable by indoi-sement.
Cox indorsed it to Fenner : and Fenner sued Meares. It was the
first instance of the indorsee of a respondentia bond sueing the
grantor
Blackstone, J., said — ** The promise made by Meares is
sufficient. Whatever would have been due by Cox is by the
assignment transferred to Fenner. He ran the same hazard, and
is entitled to the same benefit. And I see no reason why Meares
should be in a better condition merely because his Creditor is
changed"
Nares, J. — '* I think this is a particular promise to the
Assignee, whenever any such should be "
De Grey, C. J. — "At the trial I gave an opinion that in
point of Law this action was maintainable : and I have seen no
reason to change it. It would clog these securities and be pro-
ductive of great inconvenience if they were obliged to remain in
the hands of the first Obligee. This contract is, therefore, devised
to operate upon subsequent assignments: and amounts to a
declaration, that upon such assignment, the money which I have
so borrowed shall be no longer the money of A., but of B., his
substitute. The Plaintiff is certainly entitled to the money in
conscience, and, therefore, I think also in law : for the Defendant
has promised to pay any person that shall be entitled to the
money "
s2
260 THEORY OF CREDIT
Up to the year 1800 this doctrine was never disputed. For a
period of 650 years the Courts of Common Law had displayed a
liberal and enh'ghtened spirit. Not only is it laid down by
Bracton in 1250, that all obligations of any form are transferable,
if made so by the Obligor himself, but the Courts of Law had
uniformly acted upon this doctrine. Every new species of Obli-
gation, as it came into existence according to the increasing
wants and necessities of society, was declared by the Courts of
Law to be transferable and assignable. The Courts upheld
Transferability in every form as essential to the interests of
commerce. And that all Obligations whether in the form of
Deeds, Bonds, or Specialties, or in the form of simple writing —
with one unfortunate exception — were transferable when made so
by the Obligor himself.
But in 1800 a disastrous change came over the spirit of the
Judges. Some narrow minded lawyera held that Lord Mansfield
had introduced too much Equity into Common Law, and he was
succeeded by Lord Kenyon, who was said to be an able Common
Law lawyer, but was totally wanting in the wide and liberal
education of Lord Mansfield, and became a Judge of the narrowest
and most bigoted type
In Johnson v. Gollings, 1800 (1 East, 98), Lord Kenyon held
that a promise given by a merchant to accept a bill before it was
drawn was not a valid acceptance of the bill, contrary to the
doctrine of Lord Mansfield in Pillans v. Van Mierop : and when
the acceptance of a bill did not require to be in writing
He said — ** That to allow this would be to say that a Ghose-in-
action is assignable, a doctrine to which I will never subscribe. I
cannot, as at present advised, and upon a general view of it, agree
with the case of Fenner v. Meares
Foolish old Grose, J., chimed in — " By the general rule a
Chose-in-action is not assignable, except by the custom of merchants.
The assignment of a Chose-in-action by a Bill of Exchange is
founded upon that law : and cannot be carried further than that
law will warrant "
Lord Kenyon was of a very masterful disposition, and his
TRANSFER OF DEBTS IN ENGLISH LAW 261
supposed learning imposed upon his weaker brethern, just as Lord
Holt had done just a century before. And this solitary ease swept
away the doctrines of all the text writers of English Law and the
uniform decisions of the Courts of Law for 650 years I
The doctrines then established were —
1 . That no Obligations can be created Transferable at Common
Law
2. That Bills of Exchange in simple writing are by the
custom of merchants the sole exception to this rule
3. That Promissory Notes are illegal at Common Law —
and only legalised by the Statute of Anne
4. That under no circumstances are Bonds, Deeds, Specialties,
or Instruments under seal transferable
Those who maintained these doctrines certainly showed great
legal acumen : because, if they had any eyes to see, they would
have perceived that the very ground upon which Lord Holt held
that Promissory Notes, in simple writing, were illegal, was that
they were not Deeds or Specialties I
This baleful doctrine was not long in bearing fruit. In Glyn
V. Baker, 1810 (13 East, 509) the Bast India Company had
issued bonds payable to the payee and his assigns. The Court
held that they were not negotiable. This decision raised such a
commotion that an Act was immediately passed to make East
India Bonds Negotiable like Promissory Notes
In 1857 a similar doctrine was laid down by Lord Chancellor
Cranworth in the House of Lords
A Glasgow merchant had issued instruments promising to
deliver 1,000 tons of pig iron free on board to the holder of the
document. This instrument was held to be valid and legal by ten
of the Scotch Judges against three
This instrument was simply a Promissory Note payable in
pig iron instead of in money : and though such notes are not in
common use in this country, it is quite common in the South of
Europe to draw Bills payable in produce
How any Scotch Judge could hold such document illegal is
beyond us to conceive. Because the mercantile law of Scotland
is the Law of Justinian : and, by that law, every Action, personal
or real, is saleable
262 THEORY OF CREDIT
Nevertheless, this novel portent — a Promissory Note payable
in pig iron and not in money — was too much for the nerves of
Lord Cran worth : and he gave it as his opinion that the document
was illegal. He said Bovill v. Dixo7i (H. L. Cases, 1856)—" The
effect of such a document, if valid, is to give a floating Right of
action to any person who may become possessed of it. Now, I am
prepared to say that this cannot be tolerated either by the Law of
Scotland or of England . . . Looking at the matter merely
as advising your Lordships as a Court of Appeal, I have no
hesitation in saying that independently of the Law Merchant and
of positive Statute, within neither of which classes do these scrip
notes range themselves, the Law does not either in Scotland
or in England enable any man by a written engagement to give
a floating Bight of action at the suit of any one into whose hands
the writing may come "
Most fortunately, this was only the opinion of Lord Cran worth,
and was not embodied in the judgment of the House of Lords,
which is the only thing which would have made it law : and Lord
Cran worth's opinion was perfectly open to criticism
The opinion expressed by Lord Cranworth undoubtedly repre-
sented the doctrine then held by all the judges, and if it had been
correct, it would have declared the whole business of Banking to
be illegal : because, as will be shown in a future chapter, the
whole business of banking consists in issuing floating Bights of
action
An assumed consequence of this doctrine led to another long
contest between the Courts of Law and the mercantile community
Bills of Lading were made transferable by indorsement, like
Bills of Exchange, and it was held that the captain was warranted
in delivering the goods to the Indorsee ; but it was held in a
series of cases that the Indorsee had no Bight of action against the
captain, if he refused to deliver them : as it was supposed to come
under the rule that choses-in^action were not transferable
Now, terming a Bill of Lading a chose4n-action is a vital error.
A chose^n-action is an abstract Bight to compel a person to pay
something which is his own property, and can only be brought
against a Debtor. The money a person pays a debt with, is his
own property until he voluntarily parts with it
TRANSFER OF DEBTS IN ENGLISH LAW 263
Now, the goods which a captain carries in his ship are not his
own property : and he is not a debtor for them : he is a pare
Trustee or Bailee. The property in the goods passes directly from
the Consignor to the Consignee, and through him to the Indorsees.
Hence, the last Indorsee holds the actual property in the goods.
This was fully acknowledged by the Courts. Nevertheless, the
Courts held that the Indorsee could not bring an action to recover
his own property from the captain, but must bring it in the name
of the Consignor
This dogma having been asserted in several cases, was finally
aflSrmed in the case of Thompson v. Dominy (14 M. & W., 403)
In this case the Indorsee of a Bill of Lading sued the owner
of the ship in his own name
Parke, B. (afterwards Lord Wensleydale), admitted that the
Bill of Lading was transferable from hand to hand : and it passed
the Property in the goods in it ; but he never heard of an action
being brought on it, and thought such an action quite untenable.
By the Law of England a chose-in-action is not transferable : by
the custom of merchants it is transferable in one instance, a
Bill of Exchange, but there is no authority to show that a Bill of
Lading is transferable under such a custom, so as to enable the
party to bring an action on it . • • . I never heard it
argued that a Contract was transferable, except by the Law
Merchant "
It is remarkable that this decision was in flat contradiction
to a case decided in the very same Court only a few months
previously
In Franklin v. Neate (13 M. & W., 481) a person had pawned
a watch as security for a loan. He then sold the watch to another
person, and transferred the pawn ticket to him. Tlie transferee
sued the pawnbroker for the watch on paying off the loan and
charges. The pawnbroker refused to deliver the watch to any
person but the original owner, alleging that a chose-m-actmi was
not transferable
But the Court unanimously held that the transferee had
acquired the legal property in the watch : and had the right to
sue for it in his own name, as he had acquired the same rights as
the original owner
264 THEORY OF CREDIT
It would be impossible to imagine two cases in which the
decisions were in more flagrant contradiction than in those of
Franklin v. NeatSy and Thompson v. Dominy, decided by the very
same Judges within a few months of each other
The shipowner and the pawnbroker were exactly in the same posi-
tion: they were the mere Bailees of the goods and not the proprietors.
Pawnbrokers' Tickets and Bills of Lading are instruments of exactly
the same nature: they are both documents of title, and not choses-in-
action. The Court allowed that in each case the property in the goods
passed directly from the original owner to the transferee. InFranklin
V. Neate the Court held that the Transferee had the same rights as the
original owner, and might sue the pawnbroker, though he had not
undertaken to deliver the watch to any transferee. In Thompson v.
Dominy^ the same Court held that the Indorsee had exactly the same
right as the original owner, but could not sue the bailee for his own
goods, which the bailee had expressly undertaken to deliver to the
indorsee. In the one case the Court held that the legal owner might
sue ; in the other case, the same Court held that the legal owner could
not sue !
The dogma of the Court, which by their own showing was
erroneous, being thus in hopeless conflict with the interests of the
mercantile community, had to be remedied by Act of Partiament,
as in the former case of Promissory Notes. This was done by the
Bills of Lading Amendment Act, statute 1858, c. 4
The dogma of the modern judges that choses-in-action are not
transferable, applied of course to policies of insurance: and to
remedy this the Policies of Insurance Act, 1867, was passed, to
permit assignees of Policies of Insurance to sue in their own names
Mr. Bunion remarks that this Act may be esteemed a first step
to making choses-in-action assignable at Law. The last step came
much sooner, perhaps, than Mr. Bunion expected
Appointment of a Royal Commission to prepare a Digest of the
Law of England
30. In 1867 the Government appointed a Royal Commission
to prepare a Digest of the Law of England, in anticipation of the
contemplated fusion of Law and Equity, which was subsequently
enacted by the Supreme Court of Judicature Act of 1873, which
came into operation on the 1st November, 1875
DIGEST OF LAW COMMISSION 265
Among the Commissioners were Lord Chancellor Cranworth,
Lord Westbury, Lord Cairns, Lord Hatherley, Lord Selbome, and
Lord Penzance, to mention only those of judicial rank. The
Commissioners determined to prepare digests of three branches of
the Law, as specimens of a Digest of the whole Law. They
invited members of the bar to offer themselves to prepare these
specimen digests under their superintendence. One of the branches
selected was Bills of Exchange, Bank Notes, &c
This digest was not to be a mere register of decisions. It was
expressly intended to be a declaration of the Law on all points :
and, consequently, it necessarily involved the strict investigation
and final settlement of all disputed points, contradictory doctrines,
and conflicting cases, as well as the exclusion of all erroneous
cases
In the early editions of my Theory and Practice of Banking
I had stated the law regarding the transfer of choses-in-action in
accordance with the doctrines then held by all the judges, and laid
down in all text-books of mercantile law ; as I naturally presumed
that the judges knew their own law
But upon entering into this competition, I began to reflect
that the current doctrines regarding the transfer of choses-in-action
were contradictory
While it was strenuously maintained that cJioses-in-action
were absolutely inalienable at Common Law, so as to enable
the Transferee to sue the Debtor in his own name, it was
perfectly acknowledged that in some cases it was quite legal to
transfer a Debt, and that the transferee might sue the original
debtor
It was perfectly acknowledged that if the Creditor, the Debtor,
and the Transferee met together, the Creditor might, with the
Debtor's consent, transfer his Right of action to the Transferee.
The Debtor might then agree to pay the Transferee instead of his
primary Creditor. When this was done, a valid contract was
created between the Debtor and the Transferee, which cancelled
and extinguished the two preceding contracts: that between the
Debtor and his Creditor : and that between the Creditor and the
Transferee: and the Transferee might then sue the Debtor,
because there waa now a privity of contract between them
266 THEORY OF CREDIT
This is what, as has been shown in the preceding section, is
termed a Novation: and this ^form of Novation was perfectly
acknowledged in a whole series of cases to be perfectly valid
Bat thongh it was admitted that a Debt might be sold and
alienated orally to a specific individual with whom the debtor
personally entered into a contract: it was strenuously maintained
that it was contrary to law to issue a written Obligation payable
to order or to bearer, or to any unspecified and indefinite assignee :
and it was alleged that no contract could be created between the
original Debtor, or Obligor, and such indefinite bearer or assignee
giving the latter an action against the Debtor
This, of course, involved the general question — What is the
Common Law of England respecting the transfer of Obligations
oral and written ? Or — ^What is the Common Law of England
with respect to the transfer of written Obligations which the
Obligor himself had created transferable ?
As the very purpose of the Digest was to declare the Law on
this point, it became necessary to trace the doctrine through the
whole series of Reports to their earliest sources
The result I arrived at is contained in the preceding para-
graphs, and need not be repeated here. I proved by a series of
cases, beginning about 1250, and ending in 1800 — ^a period of
650 years, that the dogma held by modem judges that choses-in-
action are inalienable at Common Law, with the sole exception of
Bills of Exchange, had no foundation whatever in fact : that it
was entirely due to the narrow dogmatism of Lord Kenyon: and
that it had no earlier date than 1800 !
Having laid these investigations before the Commissioners,
whose Chairman was Lord Cranworth, who had enunciated the
doctrine that it was not to be tolerated by the Law either of Scot- .
land or England that any person should issue floating Rights of
action against himself, I was unanimously selected to prepare the
Digest of the Law of Bills of Exchange, &c.
My selection by the Commissioners was in effect equivalent to
a judgment of the House of Lords in my favor: because the
Commissioners included all the Law Lords except one: and if they
approved of my written arguments in their capacity as Commis-
sioners, they must have done the same if I had had the opportunity
of addressing them in their capacity of Law Lords
CROUCH V. CREDIT FONCIER 267
I was invested with the duty of reducing into Bystematic and
scientific order the whole mass of cases on the subject, both at
Law and in Equity. I was instructed not to pay any regard to
any decision of any court or judge, nor to any text-book : but
that it was my duty to declare the law on every point in the
subject. This, therefore, involved the duty of examining and
approving, confirming, modifying, or reversing the decisions of all
the Courts of Law and Equity on this subject
I stated the rules of the Common Law relating to the transfer
of choses-in-aciton in these words : —
"At Common Law a Creditor cannot transfer his Debt, or Right
of action to a third person without the consent of the Debtor, so
as to enable the Transferee to sue the Debtor in his own name
" But wherever the Debtor assents to the transfer of the Debt,
either orally or in writing: the assignment of it by the Creditor is
irrevocable : and the transferee may sue the Debtor in his own name"
I set aside the whole of I^rd Holt's decisions relating to
Promissory Notes, which had been accepted as Law for 160 years,
with one exception, as erroneous : and appended this note :
" Tlie legality of Promissory Notes is sometimes supposed to
rest solely upon the Statute of Anne : but there can be no doubt
whatever that the series of decisions which were the cause of the
Act being passed are erroneous: and that the Act was superfluous"
In 1870 the Commissioners discontinued the work of Digest :
and, consequently, my digest was never published under their
authority ; but I introduced these doctrines, as having the private
approval of the Commissioners, into my Principles of Economical
Philosophy y published in 1872
The Case of Crouch v. Credit Fonder of England
31. This work had only been published a very short time
when a very awkward incident occurred
The Credit Foncier of England issued an Obligation which
they termed a Debenture, by which they promised to pay the
bearer the sum of £100 on the 1st of May, 1872, or upon any
earlier day upon which the bond should be entitled to be paid off,
or redeemed, according to certain conditions printed on it
268 THEORY OF CREDIT
The Bond farther promised to bear interest at 8 per cent.,
payable half yearly, on the Ist of November and Ist of May in
each year, from the Ist November, 1869, to the Ist May, 1872 :
unless it should be drawn for payment before the Ist May, 1872 :
in which case interest was to cease from the day it was drawn
One Macken bought ten of these debentures. In July, 1869,
his house was broken into and they were stolen. The Bond in
question was drawn for payment on the 1st November, 1870.
Macken having received substituted bonds, on giving notice of
his loss to the Company, and an indemnity, received payment of
the Debenture
At the end of 1871 the Plaintiff bought the Debenture from
a person who afterwards disappeared : and sued the Company for
payment of it
It was not disputed that he gave value for the bond without
notice : and at the trial before Bramwell, B., he gained the verdict
The questions before the Court in Banc were —
1. Whether the Debenture was a Negotiable Instrument
2. Whether, if it were so, it was not overdue, and so had lost
its attribute of '* Currency," or Negotiability
The judgment of the Court of Queen's Bench was delivered
by Blackburn, J., in the absence of the Chief Justice
He began by allowing that such Instruments had been for some
time treated as Negotiable
He then said (L. R., 8 Q. B., 374) — ** The general rule is not
disputed, that a chose-in-action cannot be transferred at law at
an • • • •
The first question, therefore, is whether this instrument is a
Promissory Note. It is under seal, and therefore is, prima faciej
a Covenant, and not a Promise: and it is quite clear that a
Covenant to pay money is not Negotiable by the custom of
merchants • . . •
" There is no case in the books where a Bill of Exchange
made under seal has been sued upon
" The negotiability of Promissory Notes depends, in part at
least, upon the Statute 8 and 4 Anne, c. 9: and it seems to have
been the opinion of Lord Justice Wood in re Geneial Estates Go,^
and of Malins, V. C, in re Imperial Land Go. of Marseilles^ that
CROUCH V. CREDIT FONCIER 269
inasmuch as that Act enacts that Promissory Notes in writing,
. . . . it follows that a Corporation fixing its seal to a written
promise to |iaj must be considered as signing the promise, not as
covenanting under seal to fulfil it : and so that Statute says by impli-
cation that, what would at Common Law be their Covenant to
pay, is their Promise to pay. But although intimating their
opinion, neither of the learned persona referred to gave any
decision on the point, as it was not necessary for the purpose of
the cases before them. Neither is it necessary for us to decide
the point, as for reasons which will presently be given, the Instru-
ment in question, even if under hand, could not be a Promissory
Note: but we wish to point out that in Glyn v. Baker the form
of the East India Bond was that the East India Company
acknowledged to have received of W. G. Sibley £100, which the
Company promised to pay to Sibley, his executors, or assigns, by
indorsement. It was therefore in form a Promissory Note, for
value received, payable to order, and had it been signed as such
by an agent of the East India Company, would have been nego-
tiable. But it was a bond under the seal of the East India
Company, and le Blanc, J., says — *It is clear that no action
could have been brought on this bond but by Sibley, the Obligee,
or in his name: or, if he died, in the name of his executora'
**The alarm occasioned by this decision was so great that
within a month afterwards an Act, 61 Geo. III., c. 64, was
passed to make East India Bonds negotiable like Promissory
Notes. It seems not to have occurred to any one that it could be
said that this was already done by virtue of the Statute of Anne,
the promise in writing being signed by the East India Company's
seal
" This seems a strong authority for saying that instruments
under the seal of a body corporate are not exceptions from the
general rule laid down in Byles on Bills that ' at Common Law
Bills of Exchange and Promissory Notes, being simple contracts,
cannot be under seal, at least, so as to retain their negotiable
qualities '
" But it is not necessary to decide in the present case whether
an instrument under the seal of a Corporation can be a Pro-
missory Note : for the contract of the Credit Foncier is not
270 THEORY OF CREDIT
merely to pay the money, bnt also to cause a portion of the bonds
to be drawn in the stipulated manner : and any one entitled to
sue on the contract contained in the instrument would be entitled
to sue for damages if the company did not fairly give him his
chance of having his bond drawn according to the stipulated
conditions. And it is obvious that such a contract as that cannot
be a Promissory Note • • . •
^^ He is also obliged to contend that they could give a Right
of action in his own name to any holder, though the general law
would give no such Right of action to the holders. There is no
decision or authority that it is competent to a party to create by
his own act a transferable Right of action on a contract. It is
enough to refer to Dixon v. Bovill and Thompson v. Dominy^
as authorities, that he cannot irrespective of custom so
create it • • .
" We have already intimated an opinion that it is beyond the
competency of the parties to a contract to confer on the assignee
of that contract a Right to sue in his own name '*
The Court then made the rale absolute to enter the verdict for
the Defendants : but gave the right to appeal. No appeal, how-
ever, was made : and if it had not been for a subsequent case,
this case might have done boundless mischief in perpetuating
error
It will be seen by referring to the preceding section that
every one of the statements in this decision, both of law and fact,
are perfectly erroneous: and are in direct contradiction to the
principles which I had established in my digest with the approval
of the Law Digest Commissioners
On ths Case of Ooodwin v. Bobarts
32. At length this great quarrel was brought to a final
settlement and determination in the case of Goodwin v. Robarfs
(L. R., 10 Exch., 337), beyond all comparison the most important
Mercantile case in modern times: or indeed of any time
The Russian Government being about to raise a loan on
Bonds^ appointed Messrs. Rothschild their agents
GOODWIN V. ROBARTS 271
Messrs. Rothschild issued Scrip for these £100 Bonds, as a
receipt for £20 paid on account of the Bonds : and as payment of
the successive instalments at the times specified, the '^ Bearer"
was to receive the definitive bonds
In February, 1874, the plaintiff purchased £200 of the
Russian scrip, on which the instalments were fully paid up in
advance : and left it in the hands of his broker : who improperly
and contrary to good faith, pledged it with the defendants as
security for a loan
The broker became bankrupt, and the defendants sold the
scrip in the usual way of business, and in ignorance of the plaintifiTs
title
It was proved that such Scrip for loans to foreign governments,
entitling the bearers thereof to bonds, had been well known to,
and largely dealt in by bankers, money dealers, and members of
the Stock Exchanges, English and Foreign, for above fifty years :
and such pei*sons had, during that period, bought and sold such
Scrip, and lent money on it : and dealt with it in every way as a
Negotiable Instrument, transferable by delivery
The question was whether such Scrip was in point of law
Negotiable : so that the defendants, the innocent holders for
value, might retain the proceeds from the true owners of it
This case, it will be observed, extended the question of
Negotiable Instruments : because all Instruments hitherto found
to be Negotiable, had been actual Obligations to pay money :
but this was only a Promise to deliver an Obligation to pay
money
The Court of Exchequer unhesitatingly gave judgment for the
defendants
The case was then taken by appeal to the Court of Exchequer
Chamber, and the unanimous judgment of the Court was given
by Lord Chief Justice Cockburn on the last day of its existence,
July 7, 1875
In the course of the argument before the Court, Lord Holt'g
cases, so often alluded to, and which I had set aside in my digest,
had been cited, and the Lord Chief Justice spoke of them in
terms of the strongest condemnation, and said that they were a
blot upon our judicial history
272 THEORY OF CREDIT
The Lord Chief Justice having reviewed all the argnments
against the negotiability of the Scrip, especially the doctrines
expressed in the preceding case of Grouch v. The Credit Foiui&r of
England, that it is not competent for any one to create floating
Rights of action against himself, said —
" Having given the fullest consideration to this argument, we
are of opinion that it cannot prevail. It is founded on the view
that the Law Merchant thus referred to is fixed and stereotyped
and incapable of being expanded and enlarged so as to meet the
wants and requirements of trade in the varying circumstances of
commerce. It is true that the Law Merchant is sometimes
spoken of as a fixed body of law, forming pait of the Common
Law, and, as it were, coeval with it. But as a matter of legal
history, this view is altogether incorrect "
The Lord Chief Justice then proceeded to speak of Bills of
Exchange and Promissory Notes, and said that the common
notion that Promissory Notes were not used in England till the
end of the seventeenth century was a mistake. " Mr. Macleod
shows that Promissory Notes payable to bearer, or to a man and
his assigns, were known in the time of Edward IV."
After referring to several of the cases before recited, he said—
"Thus far the practice of merchants, traders, and others of
treating Promissory Notes, whether payable to order or to bearer,
on the same footing as Bills of Exchange, had received the sanc-
tion of the Courts, but Holt having become Chief Justice, a
somewhat unseemly conflict arose between him and the merchants
as to the Negotiability of Promissory Notes, whether payable to
order or to bearer : the Chief Justice taking what must now be
admitted to have been a narrow minded view of the matter,
setting his face strongly against the negotiability of these instru-
ments, contrary as we are told by authority, to the opinion of
Westminster Hall : and in a series of successive cases pei-sisting
in holding them not to be negotiable by indorsement or delivery.
The inconvenience of trade arising therefrom led to the passing
of the Statute of 3 and 4 Anne, c. 9, whereby Promissory Notes
were made capable of being assigned by indorsement, or made
payable tp bearer, and such assignment was thus rendered valid,
beyond dispute or diflSculty
OOODWIN V. ROBARTS 273
*' It is obvions from the preamble of the statute, which recites
that ' ii had been held that such Notes were not within the custom
of merchants/ that these decisions were not acceptable to the
profession or to the country. Nor can there be much doubt that
by the usage prevalent among merchants these Notes had been
treated as securities negotiable by the customary method of
assignment, as much as Bills of Exchange properly so called.
The Statute of Anne may indeed practically speaking be looked
upon as a Declaratory Statute, confirming the decisions prior to
the time of Lord Holt "
The Lord Chief Justice then, having reviewed several other
cases, came to the case of Crouch v. The Credit Foncier of England^
in his own Court, but decided in his absence. He expressed dis-
approval of the reasons given for the judgment, that it was not
competent for the Company to make instruments negotiable which
were not negotiable at Common Law : though he said the judo:-
ment might be supported on the ground that the usage was not
proved to be general
"We cannot concur in thinking that if proof of general
usage had been established, it would have been a suflScient ground
for refusing to give effect to it, that it did not form part of what
is called the ancient Law Merchant
" If we could see our way to the conclusion that in holding
the scrip in question to pass by delivery, and to be available to
beai-er, we were giving effect to a usage incompatible either with
the Common Law, or with the Law Merchant, as incorporated
into and embodied in it, our decision would be a very different one
from that which we are about to pronounce. But, so far from
this being the case, we are, on the contrary, in our opinion, only
acting on the established principle of that law in giving legal
effect to a usage now become universal, to treat this form of
security, being, on the face of it, expressly made transferable to
bearer, as the representative of money, and, as such, being made
to bearer, as assignable by delivery "
The Court then affirmed the judgment of the Court of
Exchequer : and thus all the Courts of Common Law held that
the Scrip was a Negotiable Instrument. This judgment was
afterwards affirmed by the House of Lords
T
274 THEORY OF CREDIT
The Lord Chief Justice had the Paper I prepared for the Law
Digest competition before him, and, in the coarse of the judgment,
he did me the very high honor to refer to it as follows —
" We find it stated in a Law Tract, by Mr. Macleod, entitled
* Specimen of a Digest of the Law of Bills of Exchange,' printed,
we believe, as a Report to the Government ; but which, from its
research and ability, deserves to be produced in a form calculated
to ensure a wider circulation," &c.
I had already published the results arrived at in my Principles
of Economical Philosophy in 1872 : this judgment confirmed
them in every particular: and they are repeated in my Theory
and Practice of Banking, and in this work : so that I have done
whatever has been in my power to fulfil the suggestion of the
Lord Chief Justice
Ghosea-in-action made Transferable by Statute, without the
consent of the Debtor
33. The Courts of Law never adopted the bold suggestion of
Ashhurst and Buller that they should drop the formality of
requiring the Transferee of a Debt to sue in the name of the
Transferor. But this has at length been done by the Supreme
Court of Judicature Act, 1873. By sect. 25, § 6, of that Act,
it is enacted —
" Any absolute assignment by writing, under the hand of the
assignor (not purporting to be by way of charge only) of any
Debt or other legal Chose-in-action, of which express notice in
writing shall have been given to the Debtor, Trustee, or other
person from whom the assignor would have been entitled to
receive or claim, such Debt, or chose-in-action, shall be, and be
deemed to have been eflFectual in law (subject to all equities which
would have been eutitled to priority over the right of the assignee,
if this Act had not passed) to pass and transfer the legal right to
such debt, or chose-in-adion^ from the date of such notice, and
all legal and other remedies for the same, and the power to
give a good discharge for the same, without the consent of the
assignor : provided always, that if the Debtor, Trustee, or other
person liable in respect of such Debt, or chose-in-action, shall havf
TRANSFER OF DEBTS 275
had notice that such assignment is disputed by the assignor, or
any one claiming under him, or if any other opposing or conflicting
•claimstosuchDebt,or cA(?5«-m-ac/ion,he shall be entitled if he think
fit, to call upon the several persons making claim thereto to inter-
plead concerning the same, or he may, if he think fit, pay the
same into the High Court of Justice, under and in conformity
with, the provisions of the Acts for the relief of Trustees"
It will be seen that this clause confers the Right upon Creditors
to transfer their Debts, or choses'in-action, without the consent of
the Debtor : and, consequently, if the holder of an obligation not
made transferable by the express will of the obligor, gives notice
to the Debtor in terms of this clause, he can maintain an action
on it
But it still leaves untouched the case of an Obligation created
transferable with the express consent of the Obligor, which is
transferred without a written notice to the Obligor, and in such
cases, which form the vast majority, the rules of the Common Law
«till apply
If there should be any doubt on such cases, which we have
established there never was, is is provided for in § 11 of the same
-section, which says —
" Generally, in all matters not hereinbefore particularly men-
tioned, in which there is any conflict or variance between the
Rules of Equity and the Rules of the Common Law with reierence
to the same matter, the Rules of Equity shall prevail "
Thus the Mercantile Law of England is now assimilated to
that of Europe
t2
276 THEORY OF CREDIT
Section III
On the Extinction of Obligations
On the Limits of Credit
34. We have now to consider the various methods hj
which Obligations are extinguished. Credit being the Right to
demand some person to pay or do something : and Debt being-
the Duty of some person to pay or do something: of course when
the Debtor has paid or done the thing he is bound to do he has
fulfilled and discharged his duty ; and therefore the Right of the
Creditor is satisfied and extinguished : and thus the Obligation is
annihilated and extinguished
It has been shown over and over again that Credit is the^
name of a species of property, commodity, or merchandise, of the
same nature as, but inferior in degree to, money : that it fulfils-
exactly the same function as money as a medium of Exchange and
Circulation. It is a property, commodity, or merchandise cumu^
lative to money : and is in all its effects on prices and production
exactly equivalent to an equal sum of money
Credit is in fact to money what steam is to water : and, like
that power, while its use within proper limits is one of the most
beneficial inventions ever devised by the ingenuity of man, its^
misuse by unskilful and unscrupulous persons has produced the
most fearful calamities. Credit, like steam, has its limits : and
we have now to investigate the proper Umits of Credit : and ta
explain the various methods by which it is extinguished
Credit, no doubt, is of the same nature as money : being the
Right or Title to a future payment. But there is this difference
between them, that there is no time limited in which the holder
of money shall demand a satisfaction for it : nor is it limited to-
any particular satisfaction. He may keep it as long as he pleases
himself ; or he may transmit it to his descendants, and they may
exchange it for a satisfaction at any time they please
EXTINCTION OF OBLIGATIONS 277
Bat Credit is always created with the express intention of
being, or of being capable of being, extinguished at a certain
ishort definite time. It is unextinguished Credit which produces
these terrible monetary cataclysms which scatter ruin and misery
among nations. It is chiefly by the creation of excessive Credit
that over-production is brought about : which causes those
catastrophes called Commercial Crises : and it is the inability of
Credit shops to extinguish the Credit they have created —
commonly called the failure of banks — which is the cause of the
most frightful social calamities of modern times
The true limits of Credit may be seen by the etymology of the
word. Because all Credit is the promise to pay or do something
in future : and that something, whatever it is, is the Value of the
promise or Credit. That something need not necessarily be
money : it may be anything else : it may be any other chattel :
or it may be a promise to do something
The Credits, however, which are the subject of this work are
always promises to pay money : and it is just on this point that
literary Economists are utterly at fault. JBecause a Bill or Note
is an Obligation to pay money, many uninformed writers suppose
that they must always be paid in Money or Bank Notes : and
therefore that the issues of Credit have always a fixed relation to
the quantity of money in a country : or in mathematical language
are a definite function of it
Thus Colonel Torrens, who was one of the influential sect who
procured the enactment of the Bank Charter Act of 1844 says* —
** A bill of exchange may also pass from purchasers to vendors
many times a day : but no one of the successive transactions of
which it is the medium can be finally closed until the last
recipient has received in Coin or Bank Notes the amount it
represents"
Now no doubt 300 years ago, as far as we are aware, it is true
that bills were paid in money : but that has long ceased to be the
case. At the present day probably not one bill in 10,000 is ever
paid in money or banknotes : but by other methods which we
have now to describe
^The Frineiplea and Practical Operation of Sir Bdbert PeeV$ Act of 1S44 explained
and defended, p, 79
278 THEORY OF CREDIT
Those who imagine that Bills and Notes at the present day.
are always paid in money have as much idea of the present
organisation of the system of Credit as those who know nothing
of the steam engine beyond the first rude attempts of Watt, have
of the last new triple expansion engines of the Elruria or the
Vmhria : or as those who know nothing of a locomotive beyond
George Stephenson's Rocket, have of the last new locomotive on
the London and North-Western Railway
The only real difficulty in the case, as has been frequently
observed, is for lay readers and writers to understand that a Right
of action, or Promise to pay, is itself independent exchangeable
property, merchandise, or a chattel, quite distinct from the money
promised itself, and that it circulates in commerce by itself,
exactly like money
But of course the Value of the promise or Right of action is
the thing itself : and consequently if the thing itself is not forth-
coming, the Right of action has lost its Value. This considera-
tion at once shows the Limit of Credit. Assuming the Credit to
be, what is its best known form in this country, the Right to
demand Money, it is quite clear that as long as a person has in
his possession sufficient money, or what is held to he Equivalent
ti) Money, to discharge his Debt when it becomes due, the Credit
has not been excessive
In this, section we shall consider only solid Credit ; by which
we mean Credit which is redeemed at maturity ; reserving the
abuses of excessive Credit and its consequences and remedies to a
future chapter
The futile nature of the speculations of lay writers on this
subject consists in the fact that by the highly organised system of
modern Credit, it is only an infinitesimal portion of Bills that are ever
paid in money at all : but they are paid in the Equivalents to money
The institution of banks and bankers who create Currency by
means of their Credit, either in the form of Notes or Deposits, has
enlarged the Limits of Credit at least a thousand fold : but "yet
the principle of the limit remains the same. Credit always has
to be redeemed : and if this can be done the Credit has been
sound. Hence Credit is never excessive, whatever its absolute
amount may be, as long as it always returns into itself
ON ACCEPTILATION 279
On the Extinction of Obligations
35. We have now to consider the various methods by which
Obligations are extinguished. Credit being the Bight to demand
something to be paid or done : and the Debt being the Duty to
pay or do that something : the Payment or the Performance ol
the thing promised fulfils, discharges, and extinguishes the Duty :
as well as the Right. And thus the Obligation is absolutely
annihilated and extinguished
Commercial Credit in this country is always expressed to be
payable in Money: and it is often supposed that Bills of Exchange
are always paid in Money or Bank Notes. But as has been shown
in the preceding paragraph that is a vital error
There are other methods besides payment in Money, by which
Obligations are extinguished. And in this country the amount of
Bills which are paid in Money is infinitesimal compared to those
which are paid in other ways
There are four different methods by which Obligations may be
extinguished : these are —
1. By Acceptilation : or Release
2. By Payment in Money
3. By Novation : Renewal or Transfer
4. By Compensation : or Set-off
On Acceptilation: a^ojcoo-ts: aVKCTrTtXartW: or Release
36. We have already described how the Ohligatio verbis^ and
litteris : or the oral or written Obligations were created
*When the Debtor came to repay the loans the proceedings
were reversed. He brought the money to his Creditor, and said
something of this sort to him —
** Quod ego tibi promisi, habesne acceptum ?"
" Have you received ivhat I promised you ? "
*' Habeo, acceptumque tnli '^
** / have, and have entered it as received "
In this ca^e the Debtor made an entry of money paid in his
ledger, termed Expensilatio: and the Creditor made a correlative
entry of money received in his ledger, termed Acceptilatio
280 THEOBY OF CBBDIT
These entries of Expensilatio and Acceptilatio, when once
formally made in their respective ledgers of the parties were final
and conclnsive, and conid not be questioned
All Contracts or Obligations created by the mutual consent of
parties may be extinguished, cancelled, dissolved, or annihilated
by the same mutual consent of the parties by which they were
created
Consequently, if for any reason whatever, the Creditor chose
to release the Debtor from his Debt without the actual payment
of money, it was done by the solemn form of Acceptilatio
The Debtor went through the legal form of question : and the
Creditor went through the legal form of answer: and then made
the formal entry of Acceptilatio in his ledger. It was then a
valid and final Release : and it could not be questioned or
disputed
So, at present, if a Ci-editor gives a Debtor a formal written
receipt for money due : it is a valid and final release of the Debt
We shall hereafter give some examples of Acceptilation which
may surprise some of our readers
For Acceptilation, see Gains, III., 169-175 ; Institut. Justin.,
TIL, 29, 1 ; Theophilus, III, 29 ; Digest XLVI., 4 ; Basihca,
XXVI., 9
The Release of a Debt is in all cases equivalent to a Gift or
Payment in Money
37. Euler, as we have seen above, says that if a person has
nothing, and owes 50 crowns, his property is 50 crowns less than
nothing. His property is ( — 50) crowns : i.e., he is under the
Duty to pay 50 crowns, and has nothing to pay them with
He then says that if any person made the Debtor a present of
50 crowns to pay his Debt with, he would be 50 crowns richer
than he was before : though his property would then be
Euler is right so far as he goes : but he has only stated one
side of the case. Because the same result may be attained in
another way
RELEASE OF A DEBT 281
As the same resnlt follows, whoever gives him the 50 crowns,
we may sappose his Creditor makes him a gift of 50 crowns*
The Debtor then may give his Creditor back his 50 crowns : and
he so discharges his Debt. The Debtor is now 50 crowns richer
than he was before : and his property is now
Now if Money be Positive, +, the Gift of Money is also + :
and therefore the Gift of Money is + x + which equals +• Bat
there is another combination of signs which gives + : and that
is — X — ; and there is another way of arriving at this result
Suppose that instead of the double operation of the Creditor
giving his Debtor 50 crowns : and receiving them back in dis-
charge of his Debt : he simply Releases the Debtor from the
Debt. Then the Debtor would be 50 crowns richer than before
and his property would be
Now a Debt is — : and taking away or Releasing is also — :
hence Releasing a Debt is — x — . Hence Releasing a Debt is
absolutely equivalent to making a Gift of Money : that is
— x — =+ X +in Economics : as it does in every other
branch of science
This example shows that the Release of a Debt is in all cases
whatever, equivalent to the Gift or Payment of money : a principle
of immense importance in commerce : and the application of which
may sui'prise some readers
So the Digest, 1., 17, 115, says —
" Qui Obligatione liberatur videtur cepisse quid "
And Basil., II., 8, 115 — "d iXcvOepovfievo^ €vo;(i7? Soicci rt
"Be who is Released from an Obligation has gained^
So the Digest, 1., 17, 150 — " Per accepti quoque lationem egens
debitor etiam eam pecuniam quS liberatus est, cepisse videtur"
^^ An insolvent debtor being freed by a Release, has gained the
full amount of what he is released from*^
So Pothier say* — " A Release is a Donation "
So Ortolan says^ — ^*^The Release from a Debt is always classed
as a Donation in Roman Law *'
^TraiU dta Obligations
*I!x]plieation Biatorique dt$ Inst. Jtut, LIt* ii, Ut. 7. § 543, 557
282 THEORY OF CREDIT
So Von Savigny^ — " A simple Contract or the Release of a
Debt, may be the subject of a Donation "
Also^ — '* The increase of Wealth may result from ....
a Credit given to the Debtor, or the Release of a Debt
** Every Kelease of a Debt enriches the Debtor. The amount
6f the Donation is always equal to that of the Debt, even though
the debtor is insolvent. Although the Release from a Debt
destined never to be paid seems a thing of no consequence, the
increase of property does not the less exist. In effect not only,
does property represent a quantity always indeterminate, but its
total Value may also be either Positive or Negative [Negative
Property is the Inverse of a Right, /.c, a Debt or Duty.] If
then Property is reduced to a Negative Value, the Diminution of
Minus is in Law a change identical with the increase of Plus for
d Positive Value." (That is — x — = +• x +)
"The Release of aDebt^ always constitutes a Gift equal to the
amount of the Debt, even though the debtor is insolvent "
So the Release of a Debt to a debtor may be a Legacy
Application of tlie Principles of Algebra and Mercantile Law
to Commerce
38. It has now to be shown how the Algebraical doctrine
that — X — ^ + X + ; and its Legal equivalent the Release
of a Debt is in all cases equivalent to a Payment in money : are
applied in Commerce
Suppose that I owe £100 to a banker : in how many way-s can
I pay him ?
1. I may pay him £100 in actual money : that is + x +
2. If I happen to possess £100 in his Notes : I may tender,
him his own Notes : or if I have an account with him : I may
give him a cheque on my account : that is, in either case L
Release him from his Debt to me : that is — 7 X —
. That is. Releasing the banker from his Debt to me is Paying
my Debt to him
' Traite de droit Eomain, Liv. ii., ch. 3, § 142
^Tbid, ^155
3 Traite de droit Boniain^ltiv. ii., ch. 3, § 16^6
RELEASE OF A DEBT 283
3. I may pay him £50 in Money: and £50 in his own
Notes : or by Cheque on my account
Paying him in money is + x + : tendering him his own
notes : or giving him a cheque on my account -.is — x — : and
the combined effect of the two is to discharge and extinguish my
Debt of £100
Thus I may pay a Debt to my banker entirely in money :
entirely, in. his own notes, or by cheque : or partly in money, and
partly by notes or cheque : and the effect of these several modes
of payment is absolutely identical
Thus it is seen that the doctrine that taking away a Negative
Quantity is absolutely equivalent to adding a Positive Quantity is
universally true in all branches of science
That is in all sciences whatever — x — = + x + : and
in Mercantile Algebra it is to be thus interpreted — " The Release
of a Debt is in all cases equivalent to a Payment in Money "
The Release of a Debt may he held to extinguish an Ohligatwii^ v
V ^ \' t
in Three diffei'ent ways V c -"/ '
39. There are three different methods in which the Eelease ^
of a Debt may be considered to extinguish an Obligation
1. First Method. — As the Obligation was created by the
mutual consent of the parties: so it may be cancelled and
extinguished by the same mutual consent which called it into
existence
Now as we have seen that, by the general principles of
the Theory of Signs, to create an Obligation is denoted
, , f+ £100) ^ 1 ... I. ii.., *
by + ■ ^100 " • ®^ cancel, extinguish, or anninilate an
Obligation is denoted by — | _ ^loo I
Now let us observe the effect of the Negative Sign on each of.
the parties to the Obligation
284 THEORY OF CRBDIT
The Creditor's property becomes — (4- £100) :
Bat — (+ £100) = — £100
That is, the Creditor has lost £100
The Debtor's Property becomes — (— £100) :
But — (— £100) = + £100
That is, the Debtor has gained £100
Which shows that to Cancel or Release a Debt is exactly
^qaivalent to making a Gift of Money
Second Method. — As the Creditor's Right of action is simply a
piece of merchandise: goods and chattels: or a commodity: it
may be the subject of a donation or gift : exactly like any other
chattel or commodity
The Creditor may present his Right of action as a donation or
gift to the Debtor himself
Then the Debtor will have the Bight to demand (+ £100) from
himself : and also the Duty to pay ( — £100) to himself
Then his property will be + £100 — £100
These two Quantities cancel and extinguish each other,
like + A, and — a, on the same side of an eqnation. They
vanish together: the Right is not in abeyance: it is abso-
lutely extinguished. The (+ £100) ceases to exist as well
as the ( — £100); and thus, the Obligation is absolutely
extinguished
The Creditor has lost £100 : and the Debtor has gained £100
Thus, if a person makes another a gift of £100 in actual
money : and also Releases him from a Debt of £100 : the donee
has received a gift of £200
When Sir Joshua Reynolds died he held a bond of Burke's for
£2,000. By his will he Released Burke from his bond of £2,000 :
and, besides that, he bequeathed him £2,000 in money. Conse-
quently Reynolds bequeathed £4,000 to Burke
3. Third Method. — There is still a third method by which
it can be explained
When a Debtor is presented with a Right of action against
himself he fulfills two personce, or characters ; he is Creditor to
himself : and he is also Debtor to himself
WHEN (+ £100) CANCELS (—£100) 285
In his persona of Creditor, he presents his Bight of action to*
himself in his persona of Debtor. In his persona of Debtor he-
pays the Bight of action to himself in his persona of Creditor.
Hence, the Dnty is fulfilled and discharged, just as much as if
he had paid it to another individual
And thus the Obligation is not in abeyance: it is cancelled and
extinguished
W7ie7i +£100 Cancels and Extinguishes — £100; and when it
does not
40. It must, however, becarefullyobservedthat (+ £100)
and ( — £100) in the same person do not always, and in all cases,,
cancel and extinguish each other in Economics
A person's property may be represented by ( + £100) ( — £100) :
and, therefore, for practical purposes, be equal to : yet tliese two
quantities will not cancel and extinguish each other in Economics
It is only when the person has the Bight to demand from himaelfr
and the Duty to pay to himself: that both quantities vanish : and.
the Contract or Obligation is extinguished
Suppose that a person has £100 in a banker's Notes : and at-
the same time owes some other person £100
Then his property will be( + £100) ( — £100) : and his property
will in substance =>
But, in this case, the(+£100) and the( — £100) do not cancel
and extinguish each other : the (+ £100) is not extinguished as
an Economic Quantity
Because the Debtor may pay away the £100 in Notes ii>
commerce: and leave his Debt unpaid
Suppose that two bankers each hold £100 of the other's Notes.
Then the property of each banker is (+ £100) ( — £100) : and ia
substance =»
The reason of this is obvious: because, if a person has a Bight
of action against A : that is no fulfilment of his Duty to pay B
But, in this case, the (+ £100) and the ( — £100) do not cancel
and extinguish each other : because each banker may pay away
the Notes of the other in conmierce : and, therefore, there are
£200 of Economic Quantities in existence
286 THEOUY OF CREDIT
If, however, they exchange Notes, each banker will then have
the Right to demand £100 from himself: and the Duty to pay
£100 to himself
Then each of the Obligations is simultaneously extinguished :
because each banker has performed his Duty of paying the other
by releasing him from his Debt
Thus the £200 Economic Quantities vanish out of existence
Hence, it is only when the Bight and the Duty emanate from
the same person: and are again re-vested in the same person
from whom they emanated, that (+ £100) and ( — £100) cancel
each other : and the Obligation is extinguished
On Payment in Money
41. The preceding considerations will explain how a Payment
in Money extinguishes an Obligation : which very few persons
have ever thought of
Suppose that a person possesses £100 and owes a Debt of £30 ;
then his property will be £100 — £30 ; that is he possesses £100 ;
but coupled with the Duty to pay £30 at some given time
His Creditor's Eight to demand is + £30
When the Creditor demands payment of his Debt, he brings
his Eight of action to the Debtor who gives him £30 in money
in exchange for it : that is, the Debtor buys up the Eight of
action against himself
The Debtor's property is then £70 + £30— £30 ; that is £70
in money : together with the Eight to demand £30 from himself,
and the duty to pay £30 to himself
The + £30 and the — £30 cancel and extinguish each other
by either the second or the third methods described above : the
Obligation is extinguished : and the Debtor's property is now £70
The transaction is therefore seen to be a Sale or Exchange
Tims the Obligation or Contract was originally created by the
Sale or Loan of the Muiuum : and it is extinguished by the sale
or exchange of Payment
Thus an Obligation is created by one exchange, and is extin-
guished by another
ON CONFUSIO 287
* ft
On Gonfasio: /li^is
43. "When a Eight of actioa against a person comes in any
way into his own possession, so that he has both the Right to
demand from himself and the duty to pay to himself, it is termed
Confusio or concursus Debiti et Grediti in Roman Law : and /ufis
in Greek Law
It was universally agreed that the Confusio: fuiis : or concursus
debiti et crediti of a simple Debt extinguished the Obligation : but
how it does so has given rise to much subtle speculation : and for
centuries puzzled Jurists and Divines. The Divines alleged
that a Right once created cannot be destroyed : and the
Jurists said that the Right being transfen'ed to the Debtor he
cannot sue himself: and, therefore, that the Obligation is
extinguished
This explanation, however, is not satisfactory: because in
many cases a man can sue himself : he may fulfil two characters
or personce, and as one character, or j^ersowa, he may sue himself
as another character or persona
Moreover, this would only show that the right is suspended,
or in abeyance : and not that it is extinguished : and mauy
eminent Jurists seem to take this view'
Moreover, in several cases a confusio , or concursus debili et
crediti, occurs, in which the Right and the Duty unite in the
same person and are not extinguished : but may afterwards be
separated^
The considerations, however, which we have presented will
give a complete solution of the case
When one party is a Creditor and another party is a Debtor,
they are two characters, or persona
If, theu, the Right of action comes into the possession of the
Debtor, he now fulfils two characters or persona. The two
personce exist, though now united in one party, just the same as
they did when in separate parties. And these two personce may
^eal with each other in exactly the same way as when they were
separate parties. And the Obligation is extingushed by either of
the three methods described in § 39. The Obligation theu is not
isuspended: or in abeyance : it is absolutely extinguished
* Stair's Institutes
'BeU, Dictionary of the Law of Scotland^ Art.^ Confasion
288 THBOBT OF CREDIT
On Novation : fi€rd0€<ns : Benewal or Transfer
43. A Contract, or Obligation, may also be extinguished by
substituting a new Obligation for it. The new Obligation pays,.
discharges, and extinguishes the preceding one : and the extinctioa
of the preceding Obligation is the consideration for the new one
This is termed Navatio in Roman Law : fitrdOtcns in Greek
Law : and Renewal or Transfer by us
This Novatio may take place in two ways —
1. The Debtor may give the Creditor a new Obligation of
bis own in payment of the old one, which the Creditor accepts in
lieu and substitution of the former one
The New Obligation is the Price or Payment of the former
one which is thus extinguished
As, for example, when a banker agrees to renew a Promissory
Note for a customer : the new Note is payment of and extinguishes
the former one, and no Debt or Duty to pay arises until the new
Note is due
Or, when a Creditor has a Debt due to him payable on demand :
and he agrees to take a Promissory Note from his Debtor payable
in three months. The Note pays and extinguishes the Debt-
payable on demand : the extinction of the debt payable on demand
is the consideration for the Note. And no Debt or Duty to pay
arises until the Note becomes due
This form of Novatio is called Renewal by us
2. The Debtor may, in payment of his own Debt, transfer
to his Creditor a Debt due to him from some one else. If the
Creditor agrees to receive this Debt due to his Debtor in payment
of the Debt due from his Debtor, the new Obligation due from
the Debtor's Debtor pays and extinguishes the Obligation due-
from the Debtor himself
But the Creditor may retain his own debtor as surety, in case-
of the new debtor's failure to pay
A familiar instance of this is where a Debtor pays his Creditor
in Bank Notes. If the Creditor agrees to accept these in payment
of the debt, the debtor is discharged ; and the Creditor agrees to-
take the banker as his new debtor
COMPENSATION 289
So when a Debtor gives his Creditor a Bill of Exchange upoa
another person in payment of his own debt
So, if a Creditor and Debtor are customers of the same bank^
the Debtor may give his Creditor a Cheque on his account ia
payment of a Debt. If the Creditor accepts this Cheque he pays
it into his own account : the banker transfers the Credit from the
Debtor's account to the Creditor's : the debt of the banker to the
Transferor is extinguished : he becomes debtor to the Transferee.
The Transferor is released from his debt to the Transferee who
accepts the banker as his new debtor
This form of Novatio is termed Transfer
This Novatio : or fLcra^co-ts : is equivalent to a Payment in
Honey
Digest, 1., 16, 187. ** Verbum exact® pecuniae non solum ad
Solutionem referendum est sed etiam ad Delegationem "
Basil., XXV., 5, 56. "p'l^fta rtav dirairrfOivrfav )(prjfiaTft)v ov
fjuivov CIS KaraPok-qv ava<f>ip€arOai Sc?, (lAAa koX is cicro^tv ''
" ITie word Payment includes vot only payment in Money, hut
also the Transfer of a Credit "
Digest, xlvi., 3, 56. "Solvit et qui reum Delegat"
^^ He pays tvho transfers another debtor'*
Digest, xlvi., 2, 27. *' Delegare est vice sua alium reum dare
Creditori, vel cui jusserit"
*' To Delegate is to give another Debtor instead of one^s aelf
to the Creditor, or to his order*'
On Compensation : arrcf cracris : dvriXXoyos or dvT€X6yicrfios : or
Set Off
44. If two persons are mutually indebted at the same time,
each may claim that the Debt which he has against the other shall
be taken in payment of the Debt he owes
This is termed Compensation. — ^Gaius, iv., 61-68. Institut.
Just., iv., tit. vi., § 38, 39. Digest, xvi., 2, 1 — "Compensatio est
Debiti et Crediti inter se contributio "
Basilica, xxiv., 10, 1 — " avTe^iracris ccttiv ;(p€ous kcu Savct-
iTfJuiTOS avreXXoyos "
" Compensation is the mutual Set Off of Debts and Credits *'
U
290 THEOBY OF CBEDIT
If the mntiiBl Debts are eqnal each is payment in fnll for the
other: thej are weighed and Set Off against each other
If one Debt is greater than the other, equal amonnts compen-
sate each other : and the balance only is dne in Money
Simple as this may appear, it took a long time, both in Roman
and English Law to arrive at it
In early Soman Law Compensation was not allowed as a
matter of right : each Creditor had a Bight of action against the
other
Afterwards, in the time of Gains, compensation was not held
to be payment : but the Praetor or Equity Judge allowed a counter
debt to be pleaded as a defence in an action of Debt
Marcus Aurelius allowed it as a matter of right : and thus,
mutual Debts became Money, or Legal Tender, with respect to
each other
Digest^ xvi., 2, 21 — " Compensationes debitorum ipso jure
fient "
Bcisil,^ xziv., 10, 21 — '* oi rcSv )(p€<av <rvfiilrrj<l>urfiot iBu^ StKoCfo
yivovrai.
" The Compensation of Debts is a legal right "
Bankers, Argentarii, however, were always obliged to allow
Compensation for counter-claims
The rule of the Common Law of England was the same as
the early law of Rome. If two persons were mutually indebted
each had to bring his action against the other
Equity, however, which adopted the law of the Pandects, and
the Basilica, always allowed Compensation or Set Off
In many cases the rule of Common Law worked great injustice.
If a person and a bankrupt were mutually indebted, the person
was obliged to pay his debt in full, and only received a dividend
on the bankrupt's estate. To remedy this the Act, Statute 4,
Anne, c. 17, allowed set off in cases of bankruptcy : and this was
extended by Statutes, 2 Qeo. II., c. 22, sections 12: and 8 Geo.
II., c. 24, s. 4
COMPENSATION 291
Bat, now, by the Supreme Conrt of Jadicatnre Act, which
enacts that in all cases in which the rules of Equity conflict with
the rales of Law those of Equity shall prevail, Compensation is
allowed in all cases. Hence, if two persons are mutually indebted,
«ach Debt is Legal Tender, or Money, for the payment of the
other
Both Debts, however, must have actually accrued due at the
time to be the subjects of Compensation, or Set Off
Digest^ xvi., 2, 12 — " Quod debetur in diem non compensa-
bitur antequam dies veniat "
Basil,, XX vi., 10, 7 — **t6 viro iffiipav irpo rrjs ijfiipa^ ov
<n)fiAlrrf<l>p^€rai, "
^' A Debt which is not due cannot he compensated*^
As, for instance, if a banker holds a customer's acceptance not
yet due he cannot retain a balance on his customer's account to
meet it ; because his customer's Debt does not come into existence
until the acceptance becomes due
So, if a banker holds a merchant's acceptance not yet due : and
the merchant holds notes of the banker, the banker must pay his
notes on demand and cannot set off the merchant's acceptance :
because the merchant's Debt has not yet come into existence
So, for a similar reason, if two merchants hold each other's
acceptances one of which is due and the other not due they cannot
be compensated
If a Debt not yet due was set off against a Debt that had
become due, it was called Deductio
The following are examples of Compensation, or Set Off —
1. Suppose that two bankers issue Notes, and each has got
possession of £100 in Notes of the other. Then each banker
is two personcR : he is Creditor, or has a Bight of Action
(H- £100) against the other : and each is Debtor, or has the
Duty to pay ( — £100) his own Notes to the other
So long as the Notes of each Banker are in the hands of the
other, there are, of course, £200 of Rights of action, Credits, or
Debts in existence
u2
292 THEORY OF CREDIT
Bat when thej exchaDge Notes, each tenders to the other the
Debt he has against him in payment of the Debt dae to him
Each Banker still continacs to be two persoruB : but instead
of each being Debtor to the other : each is now Debtor to himself
It is a case of double Gonfuxio. As Creditor he demands
payment from himself as Debtor : and, as Debtor, he pays to
himself as Creditor the debt he has against himself. The Debtor
has now performed the duty of paying his Debt: and so each
Obligation is extinguished : and the £200 cease to exist as
Economic Quantities
2. Suppose a banker holds a merchant's acceptance for £100
which has become due ; sappose that the merchant holds £100 of
I the banker's Notes : or has an account with him. When the
banker demands payment of the acceptance of the merchant he
tenders him his own Notes in payment : or the banker simply
writes off the amount of the acceptance from his customer's
account : and, as before, both Obligations are extinguished
3. Suppose that two merchants have issued equal acceptances
each payable on the same day. Suppose also that the acceptance
of each merchant gets into the possession of the other. On the
day of payment each merchant tenders to the other his own
acceptance in payment of the acceptance due to him : and thus.
as before, both Obligations are extinguished
A striking and important example of compensation was formerlj
in use on the Continent before bankers discounted mercantile
bills
At numerous mercantile centres of commerce, Lyons, Antwerp,
Nuremberg, Hamburgh, and many others, there were held great
fairs every three months. The Continental merchants, instead of
making their Bills payable at their own houses, where they must
have kept large amounts of cash to meet them, made them payable
only at these fairs. In the meantime these bills circulated
throughout the country like money, and got covered with indorse-
ments
On a certain day of the fair the merchants met together and
presented their acceptances to each other : and if their respective
claims were equal they were balanced and paid by being exchanged
against each other, by Compensation. By this means an enormous-
RATIO OF CREDIT TO MONEY 293
^omjneroe was carried on and liquidated without any specie at
all. Boi&guillebert, one of the morning stars of Modern Eco-
nomics, says that at the fair of Lyons transactions to the amount
of 80,000,000 (livres ?) were settled, without the use of a single
coin
We thus see what a prodigious extension of Credit and com-
merce is effected under the modern highly organized system, whose
Juridical principles were elaborated by the Roman Jurists. We
showed that in early society the first use of money was to represent
the balances which arose from the unequal exchanges of products :
but modern commerce rs not now carried on by Money, but by
€redit : and except in small retail transactions. Money is only
used now to pay unequal balances of Debts
We have now developed the complete Theory of Credit : and
explained the great Juridical and Mathematical principles upon
which it is based. It is shown that the principles of Commerce
are capable of the strictest scientific demonstration
In two following chapters we shall show how the great scientific
principles of Credit are exemplified in the mechanism of Commerce
and the great business of Banking
On the Ratio of Credit to Money
45. Credit then being clearly understood to be the name of
a species of commodity or merchandise of the same nature as
Money, but of an inferior order, it is of considerable practical
importance to discover the ratio which Credit and Money bear to
each other in this country. The difficulties which prevent
private inquiries are very great : and the opportunities which are
presented by Parliamentary inquiries into Commercial Crises
«re very rarely made use of for any but their immediate
purpose
In the report, however, of the Committee of the House of
•Commons on the crisis of 1857 there is given an interesting
statement by Mr. Slater, of the great house of Morrison, Dillon
and Co., which may furnish us with a clue to answer this
question
294 THEORT OF CREDIT
HaviDg analysed the operations of his house for 1856, he
gave in the following table as showing the proportion in which
each million of receipts and payments were made in Money and
in varions forms of Credit
In BankfiEB' Drafts, and Mercantile BiUs payable after £
date 533,596
Cheques payable on demand 357,715
Conntry Bankers* Notes 9,627
Bank of England Notes 68,554
Gold 28,089
Silver and Copper 1,486
Post Office Orders . , 933
900,938
99,062
£1,000,000
Payments
£
Bills of Exchange 302,674
Gheqnes on London Bankers . . . , . 663,672
Bank of England Notes 22,743
Gold 9,427
Silver and Copper 1,484
966,346
33,654
£1,000,000
Here it is shown that in this great house, which may he
reasonably supposed to represent commerce in general, specie
did not enter into their transactions for little more than 2 per
cent.
A similar investigation instituted by some bankers, resulted
in the fact that specie only entered into their operations to the
amount of 4 per thousand
These investigations furnish a clue by which we may obtain a
rough estimate of the ratio of Credit to Money
TWO BRANCHES OF CREDIT 295
It is nsaally considered that the quantity of money, gold and
silver, in circulation in this country may be estimated at not far
from £120,000,000 : and if there be 50 times as much Credit as
Money, as the above figures indicate, it would appear that the
quantity of Credit of all kinds in the country is about
£6,000,000,000
This, of course, is only a rough approximate estimate : but it
is sufficient to show the enormous magnitude of this species of
Property, and its supreme importance in modem times. This
Credit produces exactly the same effects : and affects Prices
exactly as so much Gold : Prices are estimated by the aggregate
of the Money and Credit : which constitute the Circulating
Medium, or Currency : and it is through the excessive creation of
this species of Property that all Commercial Crises are brought about
Moreover, when we grasp the conception that all this mass of
Credit, and other securities of a similar nature, is so much
exchangeable Property, which can be bought and sold, donated,
pledged, and exported, and imported between country and country,
exactly like any material commodities, it compels a thorough
re-investigation of all the Fundamental Concepts of Economics :
and shows how utterly erroneous is the doctrine that Labor and
Materiality are necessary to Value : and that all Wealth is the
product of Land, Labor, and Capital
Two Branchee of the System of Credit
46. Having now developed the complete Juridical and
Mathematical Theory of Credit — that is explained how Credits or
Debts are created, transferred, sold, or exchanged, and extinguished,
we shall, in two following chapters, exhibit the actual mechanism
of the great System of Credit
The System of Credit is divided into two great Branches —
Mercantile Credit and Banking Credit
I In Mercantile Credit merchants buy or circulate commodities
' by means of Credits, or Debts, payable at a certain fixed date :
and these Credits may circulate in commerce and effect exchanges
exactly like money until they are paid off and extinguished ; and
Mercantile Debts are always extinguished when they become due
296 THBOBT OF CREDIT
In Banking Credit bankers bnj gold and Mercantile Debts
payable at a future time, by creating and issaing Credits or Debts
of their own payable on demand. Banking Credits are created
\ payable on demand : and must be paid if demanded. But they
. are not intended to be extinguished. On the contrary, they are
-created with the hope and expectation that they will not be
demanded and extinguished : but continue in existence and do
duty as Money. There is no necessity that Banking Credit should
ever be extinguished. It may be transferred from one account to
another in the same bank, and from one bank to another to the
end of time. It is quite possible that much of the Banking
Credit which exists at the present day may have been created by
the very first banks founded in this country : and there is no
necessary reason why it should not continue till the end of time.
Money is a very expensive machine to purchase and keep up : but
Banking Credits cost nothing to create, and they may endure
for ever
These two departments of Credit are perfectly distinct : are
governed by different principles : and are, in some respects,
antagonistic to each other. The same persons should never carry
on both branches of business : that is, great bankers should not
be merchants ; and great merchants should not be bankers ;
because .the duty of bankers is often contrary to the interests of
merchants
SAY. AND MILL ON CREDIT 297
CHAPTER IV
On the Self-Contradictions of J. B. Say and J. S. Mill on
Credit
1. In the preceding chapter we have explained the juridical
and mathematical principles of the great system of Credit : and
have explained the errors which certain mathematical and other
writens have fallen into from a want of knowledge of the principles
of Mercantile Law. But though these writers committed errors,
they did not flatly contradict themselves
We should now only be too glad to exhibit the application of
these principles in practical biwiness, but we are compelled to
delay our progress to show the incredible self-contradictions of
Say and Mill on the subject of Credit. It is, as we conceive, an
essential duty in such a work as this, not only to explain the true
principles of the subject, but to point out and refute all the
popular and current errors on the subject : and the mischief done
by Say and Mill is far too serious to be passed over
Jurists of all nations include Rights of action such as Credits
or Debts under the terms Fecunia, Res, Bona, Merx : xpvH^'''^9
wpdyfiara, -ttXovtos, dyaOd, oTkos, ovcrta, goods : chattels, merchan-
dise : commodities : and writers on Economics, seeing that
Credits in the form of Bank Notes, Bills of Exchange, &c., per-
formed exactly the same functions in circulating commodities as
Money, classed Credit under the title of Capital, without giving
any very nice definition of Credit or of Capital. But no one
had worked out the Theory of Credit : or had demonstrated its
true limits
Every one knows, however, that in recent times the most
unsparing ridicule has been poured on the expression that
** Credit is Capital." J. B. Say made the wonderful discovery
298 THEORY OP CREDIT
that the whole world was under a delusion, and that when they
said that *' Credit is Capital/' they were such dolts as to maintain
that the same thing can be in two places at once ! !
Turgoi first erred on Credit
2. Turgot was the first person to introduce error on the
subject of Credit. When at college in 1749, and only 22 years of
age, he began to reflect on John Law's system of Paper Money,
which had produced such a frightful catastrophe in France 29
years before. In a letter addressed to the Abb^ de Cic6^ he used
an expression which has been the keynote of a fallacy, which,
developed by Say and Mill, has been sedulously propagated by
numerous writers, and has done boundless mischief to the
subject
He says — **In a word, alUCredit is a Loan: and has an
essential relation to its repayment "
Here we see the gross confusion of ideas on the subject of
Credit which is so prevalent at the present day. In this passage
we see that Turgot considers Credit to be an Operation. We
have shown that Credit is the Present Right to a Future
Payment : and how can the Eight to a future payment be an
Operation ? It would be just as rational to say that a guinea or
a bill of exchange is a loan. Turgot says that every Credit
implies a future payment : and for that reason it has Value : and
it may be bought and sold like any material chattel, such as
money : but that does not make a Bight a Transfer
Turgot's remark, therefore, that every Credit implies a future
payment, had nothing to do with the question of Law's paper
money. As long as Law confined himself to Credit, his Bank
was magnificently successful, as we have shown elsewhere.^ It
was not his system of Credit which produced the catastrophe :
but his system of Paper Money : which was not redeemable in
money : hence Turgot's remark had no application to the
question
^(Euvres de Turgot, i., p. 33
^Dictionary of Political Economy
SAY ON WEALTH 299
On the Self-Contradiction of Say on the subject of Credit
8. 1. J. B. Say, following up the erroneous notion of Turgot
on the nature of Credit, invented the phrase which so many
unthinking writers have echoed from that day to this — that those
who consider Credit to be Capital, maintain that the same thing
can he in two places at once I !
We shall show that all this confusion has ai*isen from Say
never having thought out carefully the fundamental concepts of
the science : and from his self-contradiction on almost every one
of them. Say's name formerly stood so high in the subject, and
his sneers have been chorussed by such a multitude of writers in
France and England : and the matter is in itself of such trans-
cendent importance, that we are compelled to give some space to
a thorough investigation of his views. "We must, therefore,
inquire into his notions of Wealth, Value, Capital, and Credit
On Say's Definition of Wealth
2. It is very commonly supposed that Say was the first
writer to introduce immaterial products into Economics. This,
however, we have shown is an error, as Smith expressly enumerates
** the acquired and useful abilities of the inhabitants " as part of
the Wealth of the society. We have also shown that Smith
includes Paper Credit under the term circulating Capital. Thus,
recognising the existence of the Three species of Wealth, Say
does exactly the same ; and also enumerates several other kinds of
Incorporeal Property
Say defines Wealth thus^ — ** The exclusive possession which,
in the midst of a numerous society, clearly distinguishes the
property of each person, causes this sort of thing to be the only
one to which, in common language, the name of Wealth is given
. . . . . From this circumstance not only these things
which are capable of satisfying directly the wants of man such
as nature and society have made him, but the things which can
only satisfy them indirectly, by furnishing the means of procuring
that which serves directly as Money, Instruments of Credit (Titres
de Criance) the Funds, &c."
I Cour$., Pt., i, ch. 1
300 THEOBY OF CREDIT
Again, after speaking of things of Value, such as the earth,
metals, money, com, staffs, &c., he says^ — " If one gives also the
name of wealth to the Funds, Commercial Paper (Effeta de
CommBrce,) it is clear, &c."
Again he says^ — '* You see that Wealth does not depend on
the kind of things, nor upon their physical nature, but on a
Moral Quality which each one calls their Value. Value alone
transforms a thing into Wealth, in the sense in which this word
is synonymous with liens or property. The Wealth which
resides in anything, whether it be land, a horse, or a Bill of
Exchange, ia proportional to its Value. When we speak of
things being Wealth, we do not speak of other qualities which
they can have : we only speak of their Value "
Thus, we have shown most conclusively that Say makes the
principle of Wealth to reside exclusively in Exchangeability : in
accordance with the unanimous doctrine of ancient writers for
1 ,300 years : and he expressly enumerates Tttres de Creance, and
Effets de Commerce^ that is Negotiable Paper, or Credit, as
Wealth
On Say's Definition of Value
3. We shall find exactly the same inconsistencies in Say's
notion of value as has been the ruin of so much modem
Economics. He over and over again says that Value is something
external to an object, for which it can be exchanged ; and then
he repeatedly speaks of Intrinsic Value, without the least idea that
these are contradictory conceptions
To show this we can only quote a few passages out of many.
Thus he says^ — ^*' The second circumstance to be remarked relating
to the Value of things is the impossibility to appreciate ite
absolute magnitude. It is never any thing but c(?wpara/«Ve. When
I say that a house which I point out is worth 50 thousajid fra^cs^
I affirm nothing but that the Value of this house is equal to the
sum of 50 thousand francs : but what is the Value of this sum ?
It is not a Value existing by itself, and without a comparison.
The Value of a franc, of 50 thousand francs, is composed of all
the things which one can buy for these different sums. If one
» Traia, Bk. i., ch. 1 «Cottr«, Pt. i., ch. 1 »Cottr», Pt. i., ch. 1.
SAY ON VALUE 3U1
can, in giving tliem in exchange, have a greater quantity of corn,
sugar, &c., they have a greater Value relatively to these other
•things : if one can have less, they have less Value : because the
Value of a sum of money, like all other Values, is measured by
the quantity pf things which one can get in exchange
*' The idea of Value resembles the idea of distance. We cannot
speak of the distance of an object, without making mention of
another object from which the first finds itself at a certain
distance. In the same way the idea of the Value of an object^
always supposes a relation with the Value of something else."
That is to say, it is manifestly just as absurd to speak of Intrinsic
Distance as of Intrinsic Value
Again he says, in the same chapter — ** These same principles
show that gold, silver, and money are not sought for themselves^
and are only of the Value of what they can buy "
We need not overload our pages with more quotations. These
ai*e sufficient to show that Say fully admits that the Value of a
thing is what it will exchange for : if it will exchange for more
it has greater. Value : if it will exchange for less it will have less
Value : and if it will exchange for nothing it will have na
Value
Moreover, Say repeatedly acknowledges that Value is a quality
of the Mind : and that it is the Mind of man only which confers
Value. Thus, he says^ — " Nevertheless, Value is purely a Moral
Quality : and which appears to depend upon the fugitive and
changeable will of men "
So also—** In order that a Value may be Wealth, this Value
must be recognised not by the possessor only, but by every other
person "
Here Say admits that Value does not depend upon a single
mind, but upon more than one. He goes too far in saying that
it must be recognised by every one else. Two minds are necessary
and sufficient to constitute Value
So also, he says^ — " The Value which men give to things
. . . . It is always true that if men attach Value to a thing '*
^CourBj Considerations GenlraUa
^TraiU, p. 67
302 THEORY OF CREDIT
Now, we have shown in these passages, and we might have
cited multitudes of others, if it had been necessary, that Say
clearly admits that Value is not an absolute quality of a thiug:
that it is external to itself : that the Value of a thing is anything
else for which it can be exchanged : that Value originates in the
Mind of man
Now, after these admissions, what can be more contradictory
or absurd, than for Say repeatedly to speak of Intrinsic Value ?
On Say's Definition of Capital
4. We have now to lay before our readers the extraordinary
self-contradictions of Say on Capital
Say asserts that Immaterial and Incorporeal Quantities form
Ko part of National Wealth
He says^ — "The nature of Capitals, the nature of their
functions show us very important truths. One of them is, that
Productive Capitals do not consist in fictitious and conventional
values (?) but only in real and intrinsic (!) values, which their
possessors judge convenient to devote to production. In fact,
one cannot buy productive services except with material objects
having an intrinsic (!) value. We cannot amass as Capital, and
transmit to another person anything but values incorporated in
material objects"
Again^ — " From the nature of immaterial products, it follows
that we cannot accumulate them, and that they do not serve to
augment the national capital. A nation in which there is found
a crowd of musicians, of priests, of employes, may be a nation
very much amused, well taught, and admirably well administered :
but that is all. Its capital does not receive from the labors
of these working men any direct increase, because their products
are consumed immediately they are created "
Again' — " All transmissible Capital is composed of Material
Products, for nothing can pass from hand to hand but visible
matter "
' Cours, Pt. i., ch. 10 ^TraiU, Bk. i., ch. 18
^Definitions at the end of the Traiti
SAY ON CAPITAL 303
Say maintains that Immaterial and Incorporeal Capital is
part of the National Wealth
He says^ — "Since it has been proved that Immaterial Property,
that talents, and acquired personal qualities, form an integral
portion of social wealth "
Again, he says* — **We must include among Capitals many
hiens which have a Value although they are not material. The
Practice of a lawyer or a notary : the Goodwill of a shop : the
Reputation of a sign : the Title of a periodical work : are incon-
testably wealth : we may sell them and buy them, and make
them the subject of a contract : and they are Capitals : because
they are the fruits of accumulated labor. A lawyer, by the wisdom
of his advice, by his assiduity: and other qualities, has made the
public conceive a good opinion of his chambers : this good
opinion gives him the right to larger fees : this increase of profit
is the revenue of a Capital called reputation: and this Capital is
the fruit of the labor and care which the lawyer has taken during
many years "
He also says in a note — " There are Capitals which are not incor-
porated in material things, as the practice of a notary or a commercial
enterprise : but this portion of Capital is a very real Value "
Again — ** The only immaterial Capitals which I know of are
the Practice, the Goodwill of a shop : a Profession, of a news-
paper : one can alienate, one can sell, a Capital of this species "
So again^ — ** Without a classification of things possessed
embraces them all in making a valuation of the wealth of a nation,
we are never certain of making them complete
"Our property comprising our Wealth, whatever it is, com-
prises our Natural Qualities, as well as our social riches "
And, after going through several descriptions of personal
talents, he says — "What I have said is sufficient, I think, to
convince you that Industrial faculties are Property of the same
kind as all others : and, it is only in regarding them as equal
to all others that we obtain all the social advantages attached
to the Eight of Property. For the same reason this kind
^CourSf Considdrations Qinircdes
*Cours, Pt. iv., ch, 5
304 THEORY OF CREDIT
of Property, although it is difficult to be expressed in figures,,
forms, nevertheless, part of the general Wealth of a nation. A
nation where industrial capacities are more numerous and more-
eminent than elsewhei^e h a more wealthy nation "
These extracts require no comment
Say admits that Instruments of Credit are Capital
6. We shall now show that Say explicitly declares that Credit-
is Capital
He says^ — " This is why from the moment that this Value
resides in objects employed in a productive operation I name it
Capital, whatever be the objects in which it resides '*
Again^ — ** These Capital Values may consist of the Publie
Funds, Commercial Paper, coflPee-berries, or any other merchandise^
which will sell "
Again^ — " The form under which Capital Value presents itself
makes no difference "
He then enters into the subject more minutely*— 7" A Bill on
demand, or a bill of exchange are obligations contracted to pay,.
or cause to be paid, a sum either at another time or at another
place "
The Right attached to this order (although its Value is not
demandable at the time or the place where one is) gives it, never-
theless, a Present Value, more or less great. Thus a bill for 100
francs, payable at Paris, in two months, may be negociated or
sold for the price of 99 francs : a bill for a similar sum payable
at Marseilles at the same time, will be worth at Paris perhaps 9&
francs
*' Hence, a bill of exchange, by virtue of its future value, has-
a Present Value : it can be employed instead of money in every
species of purchase, so that the greater part of the great com-
mercial transactions are effected by bills of exchange "
Again, he says^ — "There is, nevertheless, an important observa-
tion to make relating to the representative signs of money. It is
that they are capable of rendering a service exactly similar to the
» CmtrSj Pt. iv., p. 131 ^Cours, Pt. i., ch. 6 ^Coura, Pt. i., p. 135
*TraiU, Bk. i., ch. 30 ^CourSy Pt. iii., div. 8, ch. 27
SAY ON NEGOTIABLE PAPER 305
money they represent. If any one signs an Obligation by
which he binds himself to deliver, at a fixed period, a cloak,
made in such a fashion, this proDiise, although it is in some
sort a sign, or pledge, of the possession of the cloak, cannot
take its place : because a sheet of paper does not protect from
cold, like a cloak : whilst the signs which represent money, can
replace it completely, and render all the services which it can*
In fact, the qualities which make a bag of money serve us in
exchanges can be found in a bill. These qualities, you will
remember, are —
** First, in the Value which it has. One can give a bill exactly
the same Value as to a sum of money : in giving the bearer the
right to receive the sum, so as to take away from him all doubt
as to the payment : it is that a bank note can circulate ten yeara
in preserving a value of a thousand francs without being paid,
only because one believes that he will be the moment he pleases "
We have thus laid before our readers the explicit admission
of Say that an Instrument of Credit may be of the Value of
money, and perform all the functions of money
He further says^ — " Every private person can sign an ordinary
bill, and give it in payment of merchandise, provided that the
seller consents to receive it as if it were money. This seller in
his turn, if he is the buyer of other merchandise, can give the
same bill in payment. The second acquirer can pass it to a third
with the same object. There is an Obligation which circulates :
it serves him who wishes to sell : it serves him who wishes to buy :
it fills the office of a sum of money
" The Value of a sign depends on the value of the thing signi-
fied : but, in order that this value may be exactly as great as
that of the thing of which it is the pledge, the payment of the
bill must not only be certain, but demandable on the instant . . .
" If bills of Credit could replace completely metallic money, it
is evident that a Bank of circulation veritably augments the sum
of National Wealth : because, in this case, the metallic Wealth
becoming superfluous as an agent of circulation, and, nevertheless,
preserving its own value, becomes disposable and can serve other
* CourSf Pt. iii., ch. 18
W
306 THEORY OF CREDIT
parpofles. Bat how does this sabstitntioii take place ? What are
its limits? What classes of society make their profit of the
interest of ihs New Funds added to the Capital of the nation f
^ According as a bank issues its notes, and the public consents
to receive them on the same footing as metallic money, the
number of monetary units increases
^'We most not, however, think that the value withdrawn
from the sum of money, and added to the sam of Capital
merchandise, equals the sum of notes issaed. These only
represent money when they can always be paid on demand : and
for that the bank is obliged to keep in its coffers, and conse-
quently to withdraw from circulation, a certain sum of money.
If, suppose, it issaes 100 millions of notes, it will withdraw,
perhaps, 40 millions in specie, which it will put in reserve to
meet the payments which may be demanded of it. Therefore if
it adds to the quantity of money in circnlation 100 millions, and
if it withdraws 40 millions from circulation, it is as if it added
only 60
^* We now wish to learn what class of society enjoys the use
of this New Capital ? "
Say then goes on to explain how this New Capital is employed,
and who reaps the profit of it
Now, we have shown our readers, by the most unimpeachable
evidence, that is by extracts from himself, that Say maintains that
Credit is Capital: and yet, perhaps, they will be surprised to hear
that Say was the writer who originated the sneer that those who
say that Credit may be used as Capital maintain that the same
thing may be in two places at once ! !
Say maintains that those who say that Credit is Capital e^rm
that the same thing may he in two places at once
6. We shall now place before our readers the passages in which
Say maintains that those who say that Credit is Capital are such
puzzle-headed dolts as to affirm that the same thing may be in two
places at once
SAY ON CREDIT
307
He says^ — "It is sometimes thought that Credit multiplies
Capital. This error, which is found frequently reproduced in a
<5rowd of works, of which some are written professedly on Political
Economy [Say's own work for example] supposes an absolute
ignorance of the nature and functions of Capitals (!) A Capital
18 always a very real Value fixed in a matter. [Say has himself
given several examples of Capital which are not fixed in a matter] :
becatise immaterial products are not susceptible of accumulation (!) :
•and a material prodv^ct cannot be in two places at once^ and serve
two persons at the sarnie time. [Who said it could ?] The con-
structions, the machines, the provisions, the merchandise which
-Comprise my Capital, may be the amount of the Values I have
borrowed : in this case, I carry on my industry with a Capital
which does not belong to me (!) and which I hire : but certainly
the Capital which I employ is not employed by another. He who
lends it to me is debarred from the power of working it elsewhere.
A hundred persons can merit the same confidence as I : but this
Credit, this confidence merited does not multiply the sum of
-disposable Capitals : it only causes less Capital to be kept without
use
i>
He also says* — " The manufacturer who buys on Credit raw
materials, borrows from the seller the value of this merchandise
for the time of the Credit which he gives him : and this Value
which he lends him is furnished in merchandise, which are
material values
" Hence if one can only borrow and lend Capital in material
•objects what becomes of the maxim that Credit multiplies
Capitals ? My Credit can cause me to dispose of a material
value which a capitalist has placed in reserve : but if he lends it
to me, he remains deprived of it : he cannot lend it to another
person at the same time : the manufacturer who uses this value,
who consumes it, to accomplish a productive operation, pre-
Tents another manufacturer employing it in his own "
The reader has only to compare these extracts drawn from
Say himself to be amazed at their contradictious
> Tnxiti, Bk. ii., ch. 8
«(7owr», Pt. i., cA. 9
W 2
308 THEORY OF CREDIT
In the first set Say himself admits Instruments of Credit ai*&
Wealth : and he admits that if a Bank can maintain in circulation
a greater amount of notes than it keeps gold in reserve, it
augments by so much the Capital of the country
In the second set he considers the Credit to be the material
goods lent, and then he asks, with a triumphant sneer, how can.
the same material goods be in two places at once ! !
We need not say a word more
On the Self-contradiction of Mill 07i Credit
4. 1. Turgot was the writer who, as we have shown above,
started the erroneous notion that Credit is the Transfer of some-
thing
J. B. Say further extended the error by supposing that Credit
is the Goods which are "lent :" and then he ridiculed the doctrine
that " Credit is Capital " by sneeiingly remarking that the same
thing cannot be in two places at once !
These two sentences have been repeated by a multitude of
unthinking writers in France and England from that day to
this
The number of writers who have reiterated these absurdities
is so great that we have no room to notice them : especially as we
have shown the misconceptions and self-contradictions of Turgot
and Say who are the sources of the errors
We have now to examine the doctrines of Mill, who has joined
in the sneer, and see whether he is more consistent with himself
than Say
Mill admits that Personal Credit is Wealth
2. We have first to show that Mill admits that Personal
Credit is Wealth
In accordance with the unanimous doctrine of ancient writei's
for 1,300 years, Mill says^
" Everything, therefore, forms a part of Wealth which has^
Purchasing Power"
^Preliminary HemarkSf p. 4
MILL ON CREDIT 309
Then, he says' —
" For Credit though it is not * Productive Power is Purchas-
ing Power ....'"
" The Credit which we are now called upon to consider as a
Purchasing Power . . . ."
Again^ —
''The amount of Purchasing Power which a person can
exercise is composed of all the Money in his possession and due to
him li.e., of all the Bank Notes, Bank Credits, Bills of Exchange,
4&C., belonging to liim] and of all his Credit"
** The' inclination of the mercantile public to increase their
.demand for commodities by making use of all or much of their
Credit as Purchasing Power "
" Credit/ in short, has exactly the same Purchasing Power as
Money "
Now if Mill lays down the doctrine that —
^' Everything which has Purchasing Power is Wealth ''
And if he says that —
^' Personal Credit is Purchasing Power "
Then the necessary inference is that —
Personal Credit is Wealth
That is a Syllogism from which there is no escape
Mill admits that Credit is an Independent and Transferable
Quantify,
3. The heading of one of Mill's chapters^ is — " Of Credit as
a Substitute for Money/' Now, if one quantity can be a substitute
for another, it must be of the same general nature. If a person
wants wine and cannot get it, he may put up with beer as a
substitute : but a pair of shoes could never be a substitute for a
glass of wine
Now, if Credit can be substitute for Money, Credit must be
of the same general nature as Money. But Money is an
Independent Exchangeable Quantity : hence Credit must also be
an independent Exchangeable Quantity
^Bk. iii., ch. xi., § 3 ^Bh. iii., ch. lii., §2
Ubid,, § 3 Ubid., § 3
^Bk, iii., ch. xi.
310 THEORY OF CREDIT
Accordingly, Mill speaks^ of — " Credit transferable from hand
to baud "
He also says' — '^ Bat we have now fonnd that there are other
things, sach as Bank Notes, Bills of Exchange and Cheques
[which Mill admits are Credit] which Circulate as Money : and
perform all the functions of it "
Hence we see that Mill admits that Credit is an Independent
Qaantity and Circulates exactly like Money.
Mill admits that Bights are Wealth
4. Having shown that Mill admits that Personal Credit is
Wealth, we have now to show that he admits that Eights are Wealth
He says^— *' An Order, or Note of hand, or Bill of Exchange,
payable at sight for an ounce of gold while the Credit of the giver
is unimpaired, is worth neither more nor less than the gold itself "
That is, as the Italian proverb says — " Che oro vale, oro e" —
** That which is of the value of gold is gold "
That is, Mill admits that an abstract Right which is sure of
being paid in gold, whether recorded on paper or not, is of exactly
the same value as gold
These Rights include Banking Credits, Bank Notes, Cheques,
Bills of Exchange : Book debts of traders : and private or personal
debts
Now, these Rights are all included under the title of Credit.
Hence Mill admits that Credit in all its forms, which is sure of
being paid in gold, is of the same value as Gold : and, therefore,
is Wealth equally with Gold
All these Rights, or Credit, are payable in a definite sum in
Gold : and, therefore, they have a fixed value of gold
But there are a vast variety of other kinds of Rights, which,
though not payable in a definite sum of gold, are yet saleable for
gold. These are Shares in commercial companies : Copyrights :
Patents : the Goodwill of a business, &c. These are all saleable
commodities : and, therefore, they are of the value of the Money
they will sell for
^Bk. iii., ch. xii., § 5 ^Bk, iii., ch. xii,, § 1
^Bk. iii., ch. xii., ^ 1
MILL ON CREDIT 311
Mill also^ speaks of Credit in the form of Bank Notes,
Cheques, Promissory Notes, Bills of Exchange, &c.
Now, all these documents are Bights to a future payment :
therefore Mill admits that a Credit is the Present Bight to a
Future Pajrment
Mill admits that Credit may he used as Capital
5. We have shown that Mill admits that Credit circulates as
Money, and performs all the functions of it
Now, one of the functions of Money is to he used as Capital :
and therefore, if Credit performs all the functions of Money, it
may be used as Capital as well as Money
Further on^ he is still more explicit — ** The value saved to
the community by thus dispensing with metallic money is a clear
gain to those who provide the substitute. They have the use of
twenty millions of circulating medium which have cost them only
the expense of an engraver's plate. 1/ they employ this accession
to their fortunes as Productive Capital, the produce of the country
is increased, and the community benefited as much as by any
other Capital of equal amount When paper currency
is supplied, as in our own country, by Bankers and Banking com-
panies, the amount is almost wholly turned into Productive
Capital A Banker's profession being that of a money-
lender, his issue of notes is a simple extension of his ordinary
occupation. He lends the amount to farmers, manufacturers, or
dealers, who employ it in their several businesses. So employed
it yields like any other Capital, wages of labor and profits of
stock The Capital itself in the long run becomes
entirely wages, and when replaced by the sale of the produce
becomes wages again : thus affording a perpetual fund of the
value of twenty millions for the maintenance of productive labor "
And he also says^ — " Now, an effect of this latter character
naturally attends some extensions of Credit, expecially when
taking place in the form of Bank Notes or other instruments of
exchange. The additional Bank Notes are in ordinary course
first issued to producers or dealers to be employed as Capital
. . . . and there is a real increase of Capital "
•m-. iii., ch. xi., § 6 Wk. iii., ch. xxii., § 2 ^Bk. iii., ch. xi., § 1, note
312 THEORY OF CREDIT
MUl admits that Credit may be used as Productive Capital
6. Now, if Mill admits that anything which has Parchasing
Power is Wealth
And if he says that Credit is Purchasing Power
And if he admits that Bank Notes, Cheques, Bills of Exchange,
Ac, are forms of Credit
And if he says that Bank Notes, Cheques, Bills of Exchange,
Ac, Circulate as Money, and perform all the functions of Money
And if he admits that Bank Notes, &c., may be used as Pro-
ductive Capital
Then Credit may be used as Productive Capital
That is a Sorites from which there is no escape
Mill denies that Credit is Productive Power
7. And yet the very same Mill says^ — '* For Credit, though
it is not Productive Power, is Purchasing Power"
" It is 7iot a Productive Power in itself "
" Although, therefore, the Productive funds of the country are
not increased by Credit "
And several other passages to the same effect
Mill sneers at those tcho say that Credit is Capital
8. Having thus shown that Mill admits that Credit is an
independent Quantity— that it is the Present Right to a future
payment — that it is embodied in the form of Bank Notes, Cheques,
Eills of Exchange, &c. — that they are transferable from hand to
hand — and circulate like Money and perform all the functions
of Money— and that they may be used as Productive Capital — it
may surprise some readers who are not used to Mill, to hear that
Mill not only denies that Credit is Capital, but sneers at the
imbecility of those who say so
In the chapter headed — ** Of Credit as a substitute for Money"
he says^— "The functions of Credit have been a subject of as
much misunderstanding and as much confusion of ideas as any
single topic in Political Economy ....
^Bk, iii., ch. xl., § 3 ^Bk. ill., ch. xi., ^1
MILL ON CREDIT 813
'^ As a specimen of the confused notions entertained respecting
the nature of Credit, we may adveit to the exaggerated language
«o often used respecting its national importance. Credit has a
great, but not as so many people seem to suppose, a magical power :
it cannot make something out of nothing. [Who said it could ?]
How often is an extension of Credit talked of as equivalent to a
'Creatimi of Capital^ or as if Credit actually were Capital ! !
[Why ! who lias said more distinctly than Mill himself that
Credit may be used as Capital ? The very object of the
preceding extracts is to show that Credit may be used as
Capital exactly in the same way that Money is.] It seems
strange that there should be any need to point out that Credit,
being only permission to use the Capital of another person,
the means of production cannot be increased by it, but only
transferred. If the borrower's means of production and of employ-
ing labor are increased by the Credit given him, the lender's are
as much diminished. The same sum cannot be used as Capital
both by the owner and also by the person to whom it is lent.
[Who said it could?] It cannot supply its entire value in
wages, tools and materials to two sets of laboi^ers at once.
[Who said it could ?] It is true that the Capital which A
has borrowed from B, and makes use of in his business, still
forms part of the wealth of B for other purposes, he can enter
into arrangements in reliance on it, and can boiTow when
needful an equivalent sum on the security of it : so that
to a superficial eye, it might seem as if both B and A had
the use of it at once. But the smallest consideration will
show that when B has parted with his Capital to A, the use of
it aa Capital rests with A alone, and that B has no other service
from it than in so far as his ultimate claim upon it serves him to
obtain the use of another Capital from a third person C. All
Capital (not his own) of which any person has really the use, is,
and must be, so much subtracted irom the Capital of some one
«lse"
** But though Credit is but a travsfer q/* Capital from hand to
hand"
And several other passages to the same effect
314 THEORY OF CREDIT
Confusion of Mill on Credit
9. The reader cannot fail to see the astounding confosion of
Mill's ideas in the preceding extracts
In the first set he says that Credit is the Bight to a futare
payment — that it is an independent Quantity which is bought and
sold like Money — and, therefore, may be used as Capital like
Money
In the second set he makes Credit to be the Transfer of
Capital : or an Operation
That is Mill cannot perceive the diflference between an
Independent Quantity and an Operation ! !
Now we ask — is a Bank Note the Transfer of a commodity ?
Is a Guinea the Sale of a Book ? Is a Table the Transfer of a
chair ? Is a piece of Independent Property the Transfer of
something else ? Is an Independent Quantity of any sort an
Operation ?
Mill says that Credit is the Transfer of Capital : and then he
speaks of Credit transferable from hand to hand
Now, how is it possible to Transfer the Transfer of Capital ?
To Transfer Capital is an Operation : also when Credit is trans-
ferred from hand to hand it is an Operation. But how is it
possible to Operate upon an Operation ?
Mill informs us that Credit cannot make something out of
nothing. Who said it could ? Can a guinea make something out
of nothing ?
It is not Credit which makes something out of nothing — but
the Credit itself — the Present Right to the future payment —
which Mill himself admits is of the Value of the gold promised —
which is created out of nothing by the mutual consent of the
parties to the contract— which Right by the reiterated admission
of Say and Mill is capable of circulating like Money and per-
forming all the functions of Money ; and therefore it may be used
as Capital exactly like Money
Money is used as Capital by being exchanged away for other
things, goods, or labor : or by circulating other things : and
Credit may be used to purchase goods or labor precisely in the
same way
FALSE CONCEPTS ON CREDIT 315
Moreover we see how completely Mill is in error when he
says that Credit is never anything more than the Transfer of
Capital. Credit is used to an enormous extent to purchase labor,
jnst as Money is : and Credit is also used to an enormous extent
to purchase other Credits : as will be shown more fully when we
exhibit the mechanism of Banking
After this exposition our readers will perhaps think that Mill
is not exactly the person to sneer at others for their confused
notions about Credit : though his own work is a striking example
of the misunderstanding and confusion which he says prevail
upon the subject. And many may wonder at a logician who is
unable to perceive the difference between an Independent
Quantity and an Operation
Contrast between the Idola, or False Concepts (/Debt and Credit,
and the True Ones
6. Thei-e is no method so effectiye for extenninating false
concepts, or Idola, of things as to bring them into sharp and close
contrast with the true ones. We shall, therefore, place in array,
for summary execution, the false notions of Debt and Credit
which have so bewildered and misled uninformed writers. The
reader must, therefore, observe that —
A Debt is not Money owed by the Debtor
A Debt is not a subtraction from the Property of the Debtor
A Debt is not Money in the possession of the Debtor to which
the Creditor has a Right
A Debt is the Abstract Personal Duty of the Debtor t
or Do something /^^^ ^^^^^A^
A Credit is not the thing lent [( x^ y y v j/ 1> ^ i
A Credit is not the Transfer of anything V q.
A Credit is not a Title to any specific Money or Goods'*^^:^^;^!! '-''^^
Credit, in popular language, is personal reputation which a
person has, in consequence of which he can buy Money, or Goods,
or Labor, by giving in exchange for them a Promise to pay at a
future time
A Credit in Law, Commerce and Economics, is the Right
which one Person, the Creditor, has to compel another Person, the
Debtor, to Pay or Do something
316 THEORY OF CREDIT
And the Creditor can sell this Bight of action to any one he
pleases. And it has Yalae because it will be paid, or exchanged
for the thing promised at the fixed time
It is, therefore, a saleable commodity : and it has Value for
exactly the same reason that anything else has Value
And because these Credits, Debts, or Rights of action can be
bought and sold, or exchanged, like any material chattels, they
are termed Res, Bona, Peeunia, Merx, in Roman Law : xPVH^''''h
Trpayfiara, oUo^, ovaia, in Greek Law : Goods, Chattels, Com-
modities, Merchandise, in English Law : and Wealth and Capital
in Economics
Sir Charles Lyell says that when a strange proposition is
published the world screams out that it is false : then that those
who maintain it are atheists : and then, lastly, that every one
knew it already
When years ago we said, in a former work, that Credit is
Capital, there was a shout of derision from many writers in
England and France : Whately thought it necessary to enter into
a long argument to prove to the Dons at Oxford that an Economist
is not necessarily an atheist : and now we have shown clearly that
every one knew already that Credit may be used as Capital
ON INSTRUMENTS OF CREDIT 317
CHAPTER V
UPON INSTRUMENTS OF CREDIT
Meaning of Instrnment
1. Credits, Debts, Rights of action are, then, Good»
Chattels, Commodities, Merchandise, and though in the abstract
state in which they are Incorporeal Property or Incorporeal
Chattels, they can neither be seen nor handled, and therefore
cannot be transferred by manual delivery, they may nevertheless^
be bought and sold, or exchanged as freely and easily as any
material chattels
Bat if they are written down on some material, such as paper,
parchment, or any other, they become Material or Corporeal
Chattels, and they may be transferred by manual delivery like
Money or any other material chattel
When the Credit or Debt is recorded on paper or other
material, it is termed an Instrument of Credit or of Debt : and
when used in this sense it has a technical meaning which is often
overlooked
The word Instrument has two distinct meanings —
1. Sometimes it means a tool or implement, by means of
which some purpose is effected. Thus Edgar says in Lear
" The Gods are just, and of our pleasant vices
Make Instruments to plague us "
So Smith speaks of Money as " the great Instrument of
Exchange" and *' Instrument of Commerce " : i.e.y as the means
or medium by which Exchanges or Commerce is carried on : as
we have seen, it is termed the Medium of Exchange
318 THEORY OF CREDIT
But when Bills and Notes are termed InBtroments of Credit
or of Debt, the word has quite a different meaning from what it
has in the phrase Instrument of Exchange
The term Instrument of Exchange denotes the means by
which Exchanges are effected: the term Instrument of Credit
means the Record or Document or written evidence of the Debt
In Boman Law Instrumentom means any evidence, whether
personal or written, by which a Court or Judge was informed of
a fact : or of the merits of the case
Thus Suetonius speaks of the Instrumenta Imperii^ or the
written records of the Empire : Quinctilian speaks of the
Instrumenta litis, or the documents relating to a case : Tertullian,
Erasmus, and the reformers call the Christian Scriptures the
Novum Instrumentum
This meaning is very common in English. Thus out of
innumerable instances, Hallam says — '^ Is abundantly manifest by
the Instruments of both the kings by Instru-
ments executed at Calais " : so Brougham speaking of the
declaration of American independence says—" As the clock struck
the hour when that mighty Instrument was signed "
In these and similar instances the word Instrument means a
written Record or Document
In English Law the word Instrument is restricted to written
records: and thus is equivalent to Document : which is any writing
which informs the Court of a fact : it means simply a written record
Hence an Instrument of Credit or Debt means any written
evidence of a Debt. In Courts of Law and legal treatises these
documents are invariably termed Instruments
Instruments of Credit or Debt are usually said to be of three
forms —
1. Orders to pay money
2. Promises to pay money
3. Mere acknowledgments of debt, such as an I U
4. But besides these, there is a fourth form which, though it
is not usually classed under that term, must for scientific reasons
be so : these are Credits or Debts recorded in the books of
bankers, termed in banking language Deposits. All these are
written records or evidences of Debt
BILLS OF EXCHANGE 319
Oreat Extension of the System of Bills of Exchange
2. For a considerable time the origin of Bills of Exchange
was involved in great obscurity. Many writers attributed them
to the Jews, who were severely persecuted and expelled from
Prance in 1181 by Philip Augustus. Multitudes of writers have
asserted that the Jews invented Bills of Exchange at this period
in order to transmit their effects to foreign countries. But such
an idea could only have arisen from an entire misconception of
the nature of Bills of Exchange and of an Exchange
However, the mystery is now quite cleared up. They were
invented by the Roman bankers, and their use was quite common
in the days of Cicero : and probably for a considerable time
before : as Cicero uses the technical terms respecting them which
shows that their usage must have been well established. There
is no evidence to show that they were used in commerce or were
made transferable
An Austrian friend of ours has informed us that in a Sclavonic
chronicle of the fifth century he found a provision that if Russian
merchants died at Constantinople the value of their property
should be remitted to Russia by Bills
The terrible cataclysm of the fall of the Roman Empire
probably greatly restricted the system of dealing in Credit
. between distant towns. But in the eleventh century Europe had
again begun to assume a more settled state. The cities of
Lombardy especially devoted themselves to commerce : and
Oallenga says that a treaty between the city of Asti and
Humbert II. of Savoy in 1095 shows that the cities of Asti and
Chieri had already begun to introduce the system of Bills of
Exchange and Banking into France and England
The only word in classical Latin that we are aware of for
drawing Bills is pei-muiare. But about the end of the first
century a provincial Latin word Cambio (-ire or 'iare) which
appears as campsare in Ennius and Cicero, and meant to double a
promontory, was used to mean to exchange by Columella and
Siculus Flaccus: it gradually came into common use, and was
employed by Apuleius and Charisius. Priscian, A.D. 600, pro-
320 THEORY OF CREDIT
tested against using campmre as synonymous with permutnre^
Nevertheless this meaning prevailed, and in the middle ages-
Cam ftire or Camhiare, or Gampsare completely superseded
permiitare, Cambifor, CamhiatoTy and Gampsator superseded
ArgentarmSy Mensarius, and Nummularius as meaning a money
changer : hence our word Cambist. In the middle ages Bills of
Exchange were called Litterce Gambiforia : and when Bancherius
was used for a banker they were called Litter <b Bancales, bankers'"
drafts
Weber says that Bills of Exchange were in common use in
Venice in 1171. A charter granted to the City of Hamburg in.
1189 authorised them to deal in Bills. In 1243 a statute of
Avignon relates to Utorxcambii: one of Venice in 1272 : and
many other cities passed similar statutes
About this period the system of Bills of Exchange received an
immense extension. In the times of the Crusades the Popea
claimed the right to tax all Christendom for their support. They
had their own Cambiatores, or money dealers, who kept tables in
the cathedrals to exchange the money of foreigners who came to
worship. These persons sent their own agents into different
countiies to collect the Papal tribute. As soon as they collected
a certain sum they sent the Pope bills upon their principals*
These were called littercB cambitoria. In the twelfth century
Florence became very celebrated for this " banking " business, as-
it was called. Lucca, Siena, Milan, Placentia, and numerous
other towns in the north of Italy were also famous for it. Cahors
in France also became a great Monetary, or Banking, centre :
and the name of Caorsini became synonymous with usurers :
Dante places the Caorsini in company with the Cities of the
Plain in the Inferno for this imaginary crime
In 1229 these persons were first introduced into England.
The Pope sent his chaplain Stephen and a nuncio to demand a
tenth part of all the movable goods of all persons, lay and clerical,
in England, Ireland, and Wales, to support his war against
Frederick Barbarossa. The feeble king agreed to this extraordinary
demand : but in a Parliament held to consider it, the lay lords
indignantly refused to subject their lands to the Pope. The
unfortunate ecclesiastics had no resource but to yield. The Pope
FORM OF BILLS AND NOTES 821:
drew bills upon all the Bishops and Abbots, which they were
obliged to honor under threat of excommunication. A detach*
ment of Caorsini came over with the nuncio to London, and
settled there, in order to lend money at heavy interest to the
Bishops to enable them to meet the Pope's drafts
Banke says^ — ** As it has been observed that the business of
exchange, or banking, in the middle ages, received its chief
extension from the nature of the Papal revenues, which falling
due throughout the world, had to be remitted from all quarters to
the Curia
On the Form of Bills and Notes
3. 1. We have no notice as to when the use of Bills of
Exchange by merchants became general
The oldest Bill of Exchange known to exist is dated 1S81 iQ
the following terms —
A I tiome di DiOj Amen, A prima di Fehniario^ MGGGLXXXI.^
fogateper quesia prima letter a ad usarna, da vol medesimo lihre
48 de^grosin^ sono per camhio d^ ducati 440, c?ie questi ehi hone
recevvto da Sefo el Compagni attramenls le pagate
Another is quoted by Capmany, an eminent Spanish writer,
which was drawn in 1404 by a Lucchese merchant of Bruges on
bis correspondent at Barcelona, negotiated at Bruges, but dis-
honored at Barcelona. It is in these terms —
Al nome di Dio, Amen. A die Aprile, XXVIII, 1404.
Pagate per qicesta prima di camb. a usama a Pietro Giherte e
Pietro Olivo, scuii mile a sold, x . Barcehiusi per scuto : e qtmti
scuti mille sono per camhio che con Giovanni Colombo a Gressi^
XXII de gresso pen scuto, et Pon. a nostro conto : et Ghristo vi
gtcardi. Antonio quart. Sab. di Brugis.
From the terms on which these bills are drawn it is quite
evident that they must have been long in use
^History of the Popes
X
322 THEORY OF CREDIT
In the Archives of Venice there are a considerable number of
Bills of Exchange of the 15th century, drawn by Venetian mer*
chants on their correspondents in London, but sent back
protested for non-payment
In none of these bills are there any words of negotiability :
just as thei*e need not be in Scotch bills at the present day.
Many writers have been puzzled to know when Bills of Exchange
were made transferable. But the investigation in the preceding
chapter has cleared away all mystery on the subject. They were
negotiable by the general mercantile Law of the Empire : whichi
enacted that any Creditor had the right to transfer his Debts, or
Eights of action, as freely as any other chattel
2. Obligations by the Common Law of England, to which
the legislation of Justinian never extended, were not payable to
anyone but the payee without the consent of the Obligor.
Accordingly at a very early period it was usual to make Obliga-
tions payable to the payee or his attorney, equivalent to the
modem " or order." Matthew Paris quotes an Obligation of the
Prior and convent of N., dated 1235, and made payable to certain
Milanese merchants in London, aut uni eorum vel eoi'um certo nuncia
The Statute of Merchants, 11 Edward I. (1283), is the first
Law noticing mercantile Obligations. It enacts, that if their
debtors did not pay at the agreed upon time, the merchants might
bring them before the proper authorities, and the clerk should
draw up an " escrit de Obligation," or a " lettre de Obligation,"
which the official translation renders Bill Obligatory, to which the
debtor was to affix his seal : binding him to pay on a certain day
In the 31st year of his reign, Edward I. granted a Statute to
the City of London for the protection of foreign merchants, which
enacted that they might pay the customs duties on their exports
by Bills on their principals or partners
These Bills Obligatory were Deeds in the form of promises to
pay : and, therefore, they belong to the category of instruments
classed in modern times as Promissory Notes. It was supposed
in recent times that Promissory Notes were unknown to the
Common Law, and were invented by the Goldsmith bankers*
This idea, however, is entirely erroneous
FORM OF BILLS AND NOTES 323
In process of time, but at what period we cannot say, merchants
made their Obligations in both forms of Promises to pay and
orders to pay, under seal transferable
In Arnold's Chronicle first published in 1502, but supposed
to have been founded on an earlier work, containing; many of the
customs of the City of London in the reign of Edward VI. and
Henry VII., seyeral forms of Obligation are given as being in
conmion use : of which the following are some examples —
Byll (?/ Payment
'* Be it knowen to all men, me A. B. de civitat. L. in countee
of M., marchaunt, to be bounde be thes present obligacion to
F. 6. of C. in ye counte of K. i. xii. li. lawful money of England,
to be paid to ye said F. G. or to his certeyne atturnai, his
eiers or executurs, at the fest of Sanct. M. tarchaungel next
comyng aft' ye date of this present without further delai, to the
which paiment wel and truh to be made, I bynde my eiers and
myn executurs be theis presents sealed with my seale, yeven ye
furst day of ye monethe of M. ye yere of ye regne of K. H. ye
VII. after ye conquest ye fust "
Another is made payable to Assignee —
Byll of Payment
" Memerand' this byll made the iii j day of Julij in ye xix. yere
of the reigne of Kyng Edward the iii j beryth wytnesse yt we Ric.
Shirlee of London grocer and Thomas Shirlee of London haburd'
owen unto W. Warboys and John Benson of London haburd,
xxxviij s. ij d. stg. to be payd to the said W. and J. or to ether
of them, or to their eyers ther executors, or to their Assignes, ye
furst day of Julij next coming, wythout ony delay, to the whiche
payment wel and truly to be made we binde us, our eyer?'
executors and our assignes, and eche of us in the hoole. In
wytness wherof we set to cure scales the day and tyme afore
rehersed "
A form also is given of a Bill of Exchange payable to bearer —
x2
824 THEORY OF CREDIT
Lettre of Exchaung^
Be it knowen to alle men yt I. B. A. citezen and habd' of
London have ressd by exchannge of N. A. mercer of the same
cite XX. li. 8tg. whiche twenty ponds stg. to be paid to the said N.
or to (he bring^r of this byll in synxten marte next comyng for
vi. s. viij. d. stg. ix. s. iiij. g. fllg. money currant in the said
mart, and yf ony defaut of payment be at the day in alle or ony
part yerof, that I promyse to make good all costis and scathes:
that may grow therby for defaut of payment, as well as the
principal some, bee this my furst and second lettur of payment r
and herto I bynde me myn execntors and alle my goodis wherso-
eTer they may be founde. In wytnesse wherof I have writtea
and sealyd this byll, the x day of Marche Ao. Dni. MGCGO.
Ixxxvij "
These common forms establish the fact that in the time of
Edward lY. it was usual to draw Bills of Exchange in the form
of Promissory Notes, and to make them payable to bearer : and
also that Promissoiy Notes payable to "order" and to "assigns'*
were in common use : and as a matter of course these were all
deeds under seal
As they were given as common forms at that period, they
must have originated long before : but how long we have no
knowledge of any evidence to show
There is no instance, however, of such documents being
brought before a Court of Law, which may show that our
ancestors were more punctual in their payments, or less litigious
than their descendants. If one of these documents had come
before a Court of Law, we may be certain that they would have
recognised its validity, just as they recognised the validity of
every Obligation made transferable by the Obligor
Mr. Lawson gives a copy of a Bill of Exchange also drawn in
the form of a Promissory Note in the reign of Elizabeth —
"Witnesseth this present bill of exchange that I, Bobert
Anderson, merchant, of the City of Bristowe, doe owe unto Thomas
Muu, merchant of the said city, the sum of 100 ducats : I say
FORM OF BILLS AND NOTES 335
an hundred dackets of current monie of Spain, accompting af teT
11 rials of plate to the ducket : to be paid unto the said Thomas
Mun, or his Assignee, within ten daies next, and yemediately
after the safe arrival! of the good ship called the Gabriel of
Bristowe to the port of S. Lucai in Andalousia in Spaine, or any
port of the discharge. And for the true paiment thereof, T, the
above named Robert Anderson, do bind me, my goods, my heirs,
executors and assigns, firmly by these presents. In witness of the
truth, I have caused two of these bills to be made (the which the
one being paied, the other to be voide), and have put my firme
and scale into them : and delivered them as my deed in Bristowe,
the 15th day of September, 1589, and in the 31 yeere of our
Sovereign Queen Elizabeth her Majesties reigne "
In Vanheath v. Turner (Winch. 24) in 1621, Vanheath brought
an action against Turner, and declared upon the custom of
merchants, that if any merchant over sea deliver money to a
factor, and make a Bill of Exchange u?ider his Seal, &c.
In Shelden v. Henthy (2 Show. 160) in 1680, the declaration
was on a Note nnder seal Jones, J., — " At the time of the sealing
whose deed was it?" The Court said — "The person seems
sufficiently described at the time it was made a Deed "
In the edition of " les Termes de les day " of 1708, it is said
that merchants were claiming the same right to bring actions on
signed bills as on sealed bills
The Court in Lord Holt's cases unanimously admitted that
Bills and Notes under seal were legal : their objection to signed
notes was that it was making a mere piece of paper equal to a
specialty
At this time is was perfectly indifferent whether Obligations
were drawn in the form of Orders to pay or Promises to pay :
they were equally valid at Common Law : non figurd litterarumy
Bed oratione qvam exprimimf, obligamury " We are not bound by
the form of the writing, but by the intention which it expresses,"
is equally Roman and English Law and common sense.
A Bill of Exchange in former times meant an Obligation in
any form to pay the value of a certain amount of the Money of
one country in the Money of another at a certain rate of exchange.
826 THEORY OF CREDIT
When the Obligation originated with the Creditor it naturally
was in the form of an Order addressed to the Debtor to pay i
when it originated with the Debtor it was naturally in the form
of a Promise to pay. An Obligation payable within the country
itself was called an Inland bill
The word Bill meant any writing whatever, whether under
seal or not, and therefore included Deeds or Specialties
In Marlowe's Faustus, when Faustus is selling his soul to
Mephistopheles, he tells Faustus that he —
" Must write it down
In manner of a Deed of gift."
Faustus, seeing his blood stop flowing, says —
" Is it unwilling I should write this Bill ? "
And then —
" Consummatum est: this Bill is ended "
Then says Mephistopheles —
"Speak, Faustus ; do you deliver this as your Deed"
The word Note had exactly the same meaning : so that the
words Billa and Nota meant any writing, whatever its form might
be, and whether under seal or not
Instruments of the form of Promises to pay payable within
the country were called ** Bills of Payment," " Bills of Debt,"
*' Bills of Credit," « Bills of Obligation." Bank Notes were caUed
Bank Bills. In the Act establishing the Bank of England its
Notes were termed ** Bills of Credit" and" Bills Obligatory." In
one case a Note for the payment of money was termed an inland
bill by the Court. In another case two Goldsmiths' or Bankers'
Notes were declared upon as Bills of Exchange, and were called
so throughout the case. In another case it is said — " If a mer-
chant's apprentice draws a Bill (as I do promise to pay such a
sum for my master) to charge the master with the Note^ So
in several cases Bank Notes are called Bills. In many parts of
the country at the present day Bank Notes are still called Bank
Bills t and very usually so in America
DEFINITION OF A BILL OF EXCHANGE 327
Since, however, the decisions in the cases by Lord Holt, and
the Statute of Anne described in the preceding chapter, the term
Bills of Exchange has been restricted to orders to pay : and
Promissory Notes to Promises to pay
One great establishment still keeps up the old hybrid form of
obligation in a species of paper it issues. The following is the
form of a
Bank of England Post Bill
No. London, 18
At seven days sight I promise to pay this, my sola Bill of
Exchange, to or order One Hundred sterling.
Value received of
For the Governor and Company of
£ One hundred The Bank of England.
Entd.
Definition of a Bill of Exchange
8. A written Order from one person to another who Owes,
or appears to owe, him Money as a Debtor, directing him to pay
absolutely and at all events : (1) a certain sum of money : (2) to
a certain person : (3) at a certain event : is in modern language
termed a Bill of Exchange : or shortly a Bill
The following is the usual form of a Bill of Exchange —
£250 10 6 London, May 4, 1889
Three months after date pay to A, B,, or to myself, or order,
the sum of Two hundred and fifty pounds, ten shillings, and six
pence, for value received
WiUiam Smith
To Mr. John Cox, Strand, London.
The person who addresses the letter is termed the Drawer :
the person to whom it is addressed is termed the Drawee : the
person to whom it is to be paid is termed the Payee
328 THEORY OF CREDIT
If the Drawee has not already agreed to pay the bill when it
comes into the hands of the Payee, he should take it at once to the
Drawee and request him to engage to pay it. If he agrees to do
so he must write his name, usually, but not necessarily, across the
ftce of the bill, with the word '* Accepted ": he is then termed the
Aoceptor
In England an ordinary Debtor was never compellable to
accept a bill drawn upon him by his Creditor
But in Scotland, which adopts the Law of Justinian and the
Basilica, that a Creditor has the absolute right to sell his Debt
even without the consent of the Debtor : a Debtor is bound to
accept a bill drawn upon him by his Creditor : and is liable to an
action for non-acceptance
This distinction is maintained by the Bills of Exchange Act of
1882
By the Common Law of England even if a Debtor has
accepted a bill payable to the payee only, and without the words
** or order " : the Creditor could not transfer it to any one else so
as to enable the Transferee to sue the acceptor
And any Transferee could acquire no better title to it than
that of the Transferor : consequently the bill does not possess the
iattribute of Currency or Negotiability
But in Scotland bills are transferable and negotiable without
any such words as ** or order." And a bill drawn in Scotland
payable only to the payee, being current and negotiable by the lex
loci contractus is current and neo^otiable in England
Since the Supreme Court of Judicature Act bills drawn
without the words " or order " are also current and negotiable in
England : and the presentation of the bill to the Acceptor by the
Transferee is sufficient notice of the Transfer of the Debt : even
if the drawee refuses to accept the bill
But in this case the right of the Transferee would be dependent
on the state of accounts between the drawer and the drawee
Dpjimiion of a Draft
• 4. A written order from one person to another who Holds
•a sum of money as a Depositum, as the Trustee, Bailee, or Agent,
or Servant of the Drawer, is termed a Draft or Order for the
Payment of Money
DEFINITION OF A DRAFT 329
Bills of Exchange and Drafts are of exactly the same form
and external appearance. The essential distinction between them
arises from the diflFerence in the relation between the parties to
the instrument
In a Bill of Exchange the drawee is simply the debtor of the
drawer : the property in the money drawn for resides in the
drawee : the drawer is his Creditor : and he has only a Right of
Action to compel the drawee to pay a sum of money : but he had
no right to any specific money in the drawee's possession
In a draft the property in the money resides in the drawer :
the drawee merely holds it in his possession as a Depositum : he
has possession of it merely as the Trustee, Bailee, Agent, or
Servant of the drawer : and if he appropriated it to his own
purposes it would be an embezzlement
Hence in such a case when the drawer draws a draft or order
for the payment of money and delivers it to another person, he is
not transferring a Debt or Right of action due to him : he is
directing his own servant to deliver to a certain person a portion
of his own money : which is in the custody of his servant
Also, the holder of the fund is not personally liable on such
Drafts or Orders : he is only bound to pay them if he has any
money of the owner's in his custody : consequently such a Draft
or Order is not a Credit or Personal Obligation : it is a Title to
an undefined portion of some specific money
Such an Order is not a Bill of Exchange : it is contrary to the
fundamental nature of a Bill of Exchange
So, if a bank has several branches, the order granted by the
branches on the Head Office, or vice versa^ are not Bills of
Exchange, but Drafts
Thus, the definition of Bill of Exchange usually given in law
works, and in the Bills of Exchange Act of 1882, is essentially
defective
"A Bill of Exchange is an unconditional Order, in writing,
addressed by one person to another, signed by the person giving
it, requiring the person to whom it is addressed to pay on demand,
or at a fixed or determinable future time, a certain sum in money,
or to the order of, a specified person, or to bearer "
330 THEORY OP CREDIT
Now, it is true that eveiy Bill of Exchange is'anjOrder to pay
money : but every Order to pay money is not a Bill : the word
Order to pay money includes both Bills and Drafts
Definition of a Promissory Note
5. An unconditional written Promise made by a person to
pay, absolutely and at all events : (1) a certain sum of^Money ;
(2) to a certain Person : (3) at a certain Event : is [in modem
language termed a Promissory Note : or shortly a Note
The following is the usual form of a Promissory Note —
£126 6 8 London, May 4,* 1889
Three months after date I promise to pay John JoneSy or order ^
the sum of one hundred and twenty-five pounds six shillings and
eight pence
William Johnson
"William Johnson is termed the Maker of the Note : and John
Jones the Payee
Rules relating to Bills and Notes
4. Where the Bill or Note is made payable to the Payee, " or
order," the Payee must, when he transfers the Instrument to any
one else, write his name on the back of it : hence it is termed an
Indorsement : the Payee is termed the Indorser : and the Trans-
feree is termed the Indorsee
If the Indorser simply signs his own name, and then delivers
the lustrument to the Indorsee : it is termed a General Indorse-
ment or an Indorsement in Blank. The Instrument is then
transferable by mere delivery, without any further Indorsement,
exactly like a Bank Note, or Hke Money : and the Instrument is
payable to bearer like a Bank Note
The Indorser may make the Instrument payable to some specific
Indorsee only : if he does so it is termed a Special Indorsement ;
and the instrument can only be paid to the special Indorsee
RULES RELATING TO BILLS AND NOTES 331
Formerly, Indorsement was necessary in all cases to transfer
the Property in a Bill or Note; bnt that has long ceased to be the
case in English law. It became the custom of merchants which
has loDg acquired the force of law, that any Instrument of Credit
indorsed in blank may be transferred by simple delivery, without
any further indorsement
It is, however, the general custom for the Transferee to
require the indorsement of the transferor : not for the purpose of
transferring the title or the Property in the instrument after the
first indorsement : but to retain the Transferor as a security or
guarantee for the payment of the Bill
The effect of the Indorsement is that, if the Acceptor of the
Bill, or the Maker of the Note, does not pay it at maturity : and
the Indorsee gives immediate notice to the Indorsers, he can
enforce payment from them
But the demand for payment must be made without delay : in
almost all cases within twenty-four hours after the fact of non-
payment. If the holder of the dishonored Instrument delays
giving notice, he loses his remedy, and the Indorsers are discharged
. Jn modern practice then the Indorsement is merely a limited
warranty of soundness. The difference between buying goods or
money with a Bill, with or without Indorsement, is just the same
as buying a horse, a watch, or a carriage, with or without a
limited warranty. In all cases of the sale of a horse, or a watch,
without a warranty : or of goods or money with a Bill without an
Indorsement of the Transferor, it is an absolute and final sale
When the Transferor indorses the instrument he says, in effect
— " I warrant the soundness of this Debt for twenty-four hours
and no longer "
The general rule of English law now is, that if any Instrument
of Credit be taken without Indorsement in exchange for goods or
money : or if the period allowed for making the claim in the case
of an indorsed and unpaid bill be allowed to elapse without making
the claim : it is a final closing of the transaction. The payment
is in fact as valid and final as if it were money
Except only in the case of fraud : if the Transferor knew at the
time of the transfer that the principal debtor was insolvent
If, however, the Transferor was bankrupt at the time of the
/
332 THEORY 07 CREDIT
transfer, the loss falls upon the Transferee : becanse he might
have preserved his remedy by taking the Transferor's indorsement:
and if neglects to do so he most suffer for his own lacfies
At the time when the Bank of England was founded, the
Court of King's Bench had decided that Promissory Notes were
illegal at Common Law : consequently in the Act' Statute 1694,
c. 20, 6. 29, founding the Bank, its Notes were declared to be
transferable by indorsement : and the Act of 1704, c. 8, it was
declared that all Promissory Notes might be transferred by
indorsement like Bills of Exchange
In the case, however, of Bank Notes, as their payment was
quite secure, the practice of indorsement soon fell into disuse. In
the case of private bankers of good credit the indorsement was
often omitted. But, though the indorsement was often omitted,
that in no way altered the character of the instrument : and the
receiver of the Note took it entirely at his own peril : and ran
exactly the same risk as if he took any other Instrument without
indorsement
It is usual in English Bills and Notes to insert the words " for
value received : " but it is not necessary. In a recent case it was
said that they mean nothing more than " your obedient servant "
at the end of a letter. In fact Bills of Exchange are in their
origin deeds which require no consideration : and formerly no
consideration was ever stated : it was only when it was supposed
that Bills of Exchange are simple contracts that these words were
first introduced. But there is no necessity for them : and they
are often omitted
On Banking Instruments of Credit
6. The Instruments of Credit which we have described above
may be called Commercial Instruments of Credit ; because they
arise out of the transactions of merchants. The introduction of
Banking into England gave rise to two new forms of paper,
which may be called Banking Instruments of Credit
The essential nature of "Banking" is to create Credit in
exchange for money and commercial debts. These Credits are
first of all entered in the banker's ledger. But though the banker
BANKING INSTRUMENTS OF CREDIT 33S
has issued a Credit, or Bight of action, to his customer bj making
the entry in his ledger, the customer cannot transfer his Credit,
or Right of action, to any one else by manual delivery, like money
In order to do this the Credit, or Right of action, must be
written down on some material like paper, and then it can be
transferred by manual delivery exactly like money
This might be done in two forms —
1. If the customer wished it, the Banker gave him his own
Promissory note, promising to pay the sum specified in it, either
to the customer himself, or to his order, or to bearer. Thia
jnBtrument was termed a Goldsmith's or a Banker's note
2. The customer might write a note to the banker directing
him to pay a specified sum, either to some specified person, or to
his order, or to bearer. These instruments were formerly termed
Oash Notes : but in modern language they are termed Cheques
At first Goldsmiths* or Bankers' Notes were simply written on
paper like ordinary bills of exchange
The following is a specimen of an early banker's Note —
Nov. 28, 1684
/ promise to pay unto the Et. honhle. ye Lmd North and
Orey, or hearer, ninety pounds at demand
For Mr, Francis Child and myself,
Jno. Rogers
In July, 1729, Messrs. Child & Co. were the first bankers to
adopt printed forms for their notes. But they were not printed
for definite sums like Bank of England Notes : they were partly
printed : and the name of the payee and the sum payable were
filled in in writing — like modern Cheques. Sometimes they were
payable to order, and sometimes to bearer : thus —
Picture of \ No. 921 London, Oct. 20, 1729
Temple Bar. j I promise to pay to Mr, Richard Bannister, or
order, on demand, twenty pounds
For Fras, Child, Esq.,
Sam. Child
334 THEORY OP CREDIT
Picture of | No. 1792 London, 8 Decemb., 1729
Temple Bar.) I promise to pay to Mr. Ghr. Diggs^ or hearer y
on demand, thirty pounds
F<yr Fras. Childy self, & Go.,
Sam. Child
There has been considerable donbt as to when London bankers
discontinued the issne of Notes. The latest specimen preserved
is dated April 12, 1793
For a long time considerable uncertainty prevailed as to when
Cash Notes or Cheques were first introduced. It was a very
common opinion that they were first invented about 1772. But
when the Boyal Courts of Justice were built at Temple Bar, the
excavations made for their foundations endangered the stability
of the Bar, and it had to be removed. Messrs. Child & Co.,
rented the room in the Bar, in which the records of the firm had
been kept, and, on the removal of the Bar, these had to be cleared
out, and then documents came to light which entirely set the
question at rest, and showed that Cash Notes or Cheques were
co-eval with the institution of Banking
These Cash Notes or Cheques were of various forms : some*
times payable to order or to bearer
16th Nov., 1689
Mr. Jackson, — Pray pay to the hearer hereof, Mr. Daniel
Croker,five pounds^ and place it to the accompt of
Your loving friend,
To Mr. Roger Jackson, John Wynyardb
At Sir Francis Child's, Goldsmith,
just within Temple Barr
Sometimes they were simply payable to bearer —
Mr. Childe, — Pray pay unto the hearer the sum of twenty
poundsland place it to the account of
London, Aug. 29, 1682 E. Pollexfbn
BANKING INSTRUMENTS OF CREDIT 335
Sometimes they were payable at sight —
Bolton, 4th March, 1864
At sight hereof pray pay unto Charles Duncombe, Esq.^
or order, the sum of four hundred pounds, and place it to the
accompt of
Tour assured friend.
To Captain Francis Child, Winchester
near Temple Barre
Sometimes they were payable to payee, or bearer —
To Mr. Child and Mr. Rogers July 20th, 1688.
Pray pay unto the honorable Dudley North, or bearer,
the sum of one thousand pounds, and be pleased to place it to
the account of
Your friend and servant,
Yarmouth
Sometimes they were payable to order —
3d June, 1683
Pray pay unto the Bearer hereof, Mr. Thomas Dickenson,
or order, the sum of thirty pounds, and place it to the accompt
of
Tour lo: friend,
Paul Whichoott
In some cases they were sealed —
Pray, Mr. GhUd, pay to Mr. Harrison the sum of a
hundred pounds
(Seal) D. Tyrwhitt
Sir, — I pray pay unto Mrs. Ann Richards, or her order,
the sum of £16, for your lo : friend,
To Mr. Child, or Mr. Rogers, Thos. Meres
Goldsmiths, near Temple Barr,
2 Sept., '89 (Seal)
336 THEORY OF CREDIT
The last sealed Cheque which we have seen was this —
Pray pay to my servant, Thos. B., the sum of seventeen
pounds y and for so doing this shall be your order under my hand
and seal, this 17 ih day of October^ 1737
Ancastbr, 6. C. • (Seal)
These documents are not merely mercantile curiosities : they
possess great legal and historical interest. They prove the truth
of the statement made some time ago that in the course of the
17th century sealed and signed Instruments of Credit were in
concurrent use, and held equally valid : and entirely dispose of
the fantastic crochets of modern judges and text-books that
sealed instruments of Credit are not negotiable
Moreover, the fact of there being ttvo forms of documents lot
transferring Banking Credits instead of one has had the most
momentous effect in the history of Banking in England. In
those early days Bankers' Notes were vastly more usual than
Cheques: and in framing the monopoly clauses of the Bank
Charter Act, Bankers' Notes were only regarded : and the sole
monopoly of Banking conferred upon the Bank was that of
issuing Notes : and. no person at that date conceived that the
business of banking could be carried on without issuing Notes.
But as will be shown in a future chapter, some 25 years after
London bankers had discontinued issuing Notes of their own
accord, some lynx-eyed Economists discovered that a Joint Stock
Bank carrying on business in the then manner of the London
Bankers without issuing Notes was no infringement of the Bank's
Charter : and the system of Joint Stock Banking in London was
founded
A, p. Blundell, Taylor & Co., Printers, <fec., 177, Upper Thames Street, E.G.
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